PBGC Proposes Updating Valuation Assumptions

The proposal would modify mortality, interest and expense assumptions.

The Pension Benefit Guaranty Corporation has published proposed changes to the interest rates, mortality tables and administrative expenses used to calculate “the present value of benefits for a single-employer pension plan ending in a distress or involuntary termination.”

The proposal explains that the PBGC tries to keep its actuarial assumptions in line with the assumptions and pricing used by private sector insurers. The proposal would update the PBGC’s mortality table to be more current, update interest rate assumptions to better reflect current market conditions and simplify the administrative expense calculation.

The PBGC is seeking public comment on the proposals. The comment period will close 60 days after the proposal is entered into the Federal Register.


Mortality Calculations

Bruce Cadenhead, a partner in and the global chief actuary in wealth at Mercer, says the PBGC is currently using a mortality table based on data from 1994 and is projecting into the future using a scale that is also outdated.

Under the proposal, the PBGC would update the table to one relying on data from 2012 and using “generational mortality improvement.” A generational improvement is a “more modern structure,” Cadenhead explains, which projects mortality based on the year the participant was born. The PBGC currently uses “static projection,” an “approximation of a generational table” which is less accurate because it projects mortality into the future using a fixed rate of improvement.

Cadenhead says a generational table is “more complex from a calculation standard,” because it means each participant must be calculated separately using a variable rate of mortality improvement from year to year, “but that’s become pretty standard.”

John Lowell, a partner in retirement and benefits consultant October Three, says the PBGC has not updated its mortality rules in almost 30 years. “Mortality had been based on a 1994 mortality table, while many tables have been published since then,” Lowell says, adding that the proposal would make the PBGC methods “more current.”


Interest Assumptions

Interest rates are the “most significant assumption” in calculating present value for pension funding, according to Cadenhead. Under current regulations, the PBGC surveys insurers on their pricing and uses the results in the quarter after the rate is calculated. As a result, the PBGC interest rate assumption can be “six months out of date,” and “sometimes this aligns well with the current market, and sometimes it doesn’t,” Cadenhead says.

Cadenhead explains that the rates used by insurers are closely related to yields on corporate and Treasury bonds such that they can be used instead of insurer rates in the valuing of pension assets. Better yet, those rates are available sooner and can be used to update interest assumptions monthly, rather than quarterly.

By taking a weighted average of corporate and Treasury bonds, modified with an “adjustment factor,” the PBGC can obtain a figure that closely approximates the data it would have obtained from its surveys, but in a timelier fashion. That “adjustment factor” will be obtained from the insurer surveys used under the current regulations, Cadenhead says, because those surveys are still useful in measuring the gap between the insurers’ assumptions and actual bond yields.

Lowell adds that since interest assumptions were last updated, “technology has made the use of full yield curves possible, which are more precise and far more practical.”

Administrative Expenses

When calculating present value, the PBGC also accounts for the administrative expenses involved if it had to take over a terminated plan. Currently, the PBGC uses a two-step calculation which accounts for the number of participants and the total plan assets. To simplify this process, it will instead only consider the number of participants. The administrative expense formula under the proposal would be $400 per participant for the first 200 participants and $250 for every additional participant.

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