Certain DB Interest Rate Assumptions Updated By PBGC

PBGC is adjusting the way DB plans use interest rate assumptions to value and pay benefits.

New guidance from the Pension Benefit Guaranty Corporation (PBGC) updates interest rate assumptions programmed into key regulations on benefits payable in terminated single-employer plans and the allocation of assets in single employer plans. 

Specifically, the benefits payable regulation has been updated with interest rate valuations for July 2016, while interest rate assumptions under the asset allocation regulation have been set for the whole third quarter of 2016.

As explained by PBGC, the interest assumptions are used for the valuation and payment of benefits by single-employer plans covered by the pension insurance system administered by PBGC. Background included in the text of the guidance explains PBGC’s regulations under 29 CFR Parts 4044 and 4022 prescribe actuarial assumptions—including interest assumptions—for valuing and paying plan benefits under terminating single-employer plans covered by title IV of the Employee Retirement Income Security Act (ERISA). PGBC regularly updates the interest assumptions to better reflect market conditions. 

“The interest assumptions in Appendix B to Part 4044 are used to value benefits for allocation purposes under ERISA section 4044,” the guidance explains. “PBGC uses the interest assumptions in Appendix B to Part 4022 to determine whether a benefit is payable as a lump sum and to determine the amount to pay. Appendix C to Part 4022 contains interest assumptions for private sector pension practitioners to refer to if they wish to use lump-sum interest rates determined using PBGC’s historical methodology. Currently, the rates in Appendices B and C of the benefit payment regulation are the same.”

Because the interest assumptions are intended to reflect current conditions in the financial and annuity markets, assumptions under the asset allocation regulation are updated quarterly, while assumptions under the benefit payments regulation are updated monthly.

“This final rule updates the benefit payments interest assumptions for July 2016 and updates the asset allocation interest assumptions for the third quarter (July through September) of 2016,” PBGC explains. “The third quarter 2016 interest assumptions under the allocation regulation will be 2.50% for the first 20 years following the valuation date and 2.85% thereafter. In comparison with the interest assumptions in effect for the second quarter of 2016, these interest assumptions represent no change in the select period … a decrease of 0.27% in the select rate, and a decrease of 0.01% in the ultimate rate.

The July 2016 interest assumptions under the benefit payments regulation will be 0.75% for the period during which a benefit is in pay status and 4.00% during any years preceding the benefit’s placement in pay status. “In comparison with the interest assumptions in effect for June 2016, these interest assumptions are unchanged,” PBGC clarifies.

PBGC further points out that it “has determined that notice and public comment on this amendment are impracticable and contrary to the public interest … PBGC has determined that this action is not a ‘significant regulatory action’ under the criteria set forth in Executive Order 12866. Because no general notice of proposed rulemaking is required for this amendment, the Regulatory Flexibility Act of 1980 does not apply. See 5 U.S.C. 601(2).”

The guidance is available online here