The Pension Benefit Guaranty Corporation announced on Wednesday quarterly updates to four interest rates for the year’s third quarter.
The late or defaulted rate liability will increase to 8.25% from 7.75%. Bruce Cadenhead, partner in and global chief actuary for Mercer’s wealth business, explains that when an employer leaves an underfunded multiemployer plan, they are assessed their share of the plan’s deficit when they withdraw. That liability can be paid all at once or on a payment schedule over 20 years. If the employer misses a payment, there is a late charge, which will now be 8.25% of the deficit on an annualized basis.
The late premium payment interest charge will remain at 7% for the next quarter. According to ERISA Section 4006, late insurance premiums made by pension plans to the PBGC are charged interest on the shortfall. This rate is set quarterly by the IRS.
ERISA 4044 annuity discount rates were also adjusted. The rates rest on PBGC assumptions which are based on market pricing for annuities used in order to calculate the present value of an annuity, Cadenhead explains.
There are two interest rates used for valuation: one for annuity payments occurring within 20 years and another for payments more than 20 years into the future. The rate for the first 20 years will decrease to .0524 from .0538, and the rate for payment dates more than 20 years away will decrease to .0458 from .0509.
Lastly, the PBGC published the monthly adjustment to the variable rate premiums. Cadenhead says the Treasury Department derives a monthly average of corporate bond yields. The rates are used to value vested benefits for calculating variable-rate premiums. The rates vary depending on the plan year and can be read here.