[Federal Register: July 6, 2000 (Volume 65, Number 130)]
[Proposed Rules]
[Page 41610-41612]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06jy00-24]
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PENSION BENEFIT GUARANTY CORPORATION
29 CFR Parts 4022 and 4044
RIN 1212-AA96
Title IV Aspects of Cash Balance Plans With Variable Indices
AGENCY: Pension Benefit Guaranty Corporation.
ACTION: Request for public comment.
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SUMMARY: Many cash balance plans use variable indices to determine
future retirement benefits. If such a plan terminates in a distress or
involuntary termination under Title IV of ERISA, the PBGC must make
assumptions--as of the plan's termination date--about the future
performance of the variable index. The PBGC is soliciting public
comment on what assumptions it should make about that future
performance.
DATES: Comments must be received on or before September 22, 2000.
ADDRESSES: Comments may be mailed to the Office of the General Counsel,
Pension Benefit Guaranty Corporation,
[[Page 41611]]
1200 K Street, NW., Washington, DC 20005-4026, or delivered to suite
340 at the above address. Comments also may be sent by internet e-mail
to reg.comments@pbgc.gov. Comments will be available for public
inspection at the PBGC's Communications and Public Affairs Department,
Suite 240.
FOR FURTHER INFORMATION CONTACT: Harold J. Ashner, Assistant General
Counsel, or Catherine B. Klion, Attorney, Pension Benefit Guaranty
Corporation, Office of the General Counsel, Suite 340, 1200 K Street,
NW., Washington, DC 20005-4026, 202-326-4024. (For TTY/TTD users, call
the Federal relay service toll-free at 1-800-877-8339 and ask to be
connected to 202-326-4024.)
SUPPLEMENTARY INFORMATION:
Overview
The PBGC administers the termination insurance program under Title
IV of the Employee Retirement Income Security Act of 1974 (ERISA).
Under that program, the PBGC guarantees, subject to certain limits, the
benefits payable by covered defined benefit plans.
Many of the PBGC's regulations were written in the early years of
the termination insurance program. Since that time--particularly in
recent years--defined benefit plans have undergone significant changes
in design. One of the more significant changes for the termination
insurance program is the emergence of cash balance and other hybrid
plans. These new plan designs raise novel issues for the PBGC when it
performs valuations and determines benefit entitlements. This notice
focuses on how the PBGC should perform these tasks in the case of a
cash balance plan that uses a variable index to determine participants'
benefits.
Background
A brief explanation of the PBGC's existing valuation and payment
rules and of certain aspects of cash balance plans may be helpful to an
understanding of the issues raised in this notice.
Valuation and Payment Rules for Traditional Plans
When a defined benefit plan terminates in a distress or involuntary
termination, the PBGC allocates the plan's assets among the plan's
participants and beneficiaries based on the priority categories
established under section 4044 of ERISA. To do so, the PBGC must value
the plan's benefit liabilities and the plan's assets as of the plan's
termination date. The valuation affects the amount of the PBGC's
employer liability claim for plan underfunding. It also affects the
extent to which any nonguaranteed portion of a participant's accrued
benefit is funded. (Nonguaranteed benefits may be funded either by plan
assets under ERISA section 4044 or by PBGC recoveries on its employer
liability claims under ERISA section 4022(c).) The PBGC performs this
valuation by making assumptions as to the form of the benefit, when
payments will begin (e.g., at early or normal retirement age),
interest, mortality, etc.
In the case of a traditional defined benefit plan, when the PBGC
completes its valuation it generally can determine, and tell the
participant, the amount of the annuity benefit payable (at a specified
age, and in a specified form) under the termination insurance program.
This is so even if retirement is many years away. (The actual amount of
the annuity benefit may vary depending on factors such as when the
participant chooses to start receiving the benefit and whether the
benefit is paid in a ``joint-and-survivor'' form.) Similarly, if the
PBGC pays a benefit under a traditional defined benefit plan in lump-
sum form (generally only when it cashes out a de minimis benefit of
$5,000 or less), it can determine its lump-sum value (i.e., the present
value, as of the plan's termination date, of the annuity benefit
payable by the PBGC) as soon as it completes its valuation. The PBGC
cannot make these determinations as easily in many cash balance plans.
Cash Balance Plans
A cash balance plan is a defined benefit plan that defines a
participant's retirement benefit by reference to the amount of a
hypothetical account balance. The hypothetical account balance is
credited each year with a pay credit and an interest credit, both of
which must be specified in the plan. A cash balance plan also must
specify the annuity conversion factor (e.g., a factor based on
specified interest and mortality assumptions) that it will use to
convert the hypothetical account balance to an immediate annuity
benefit. Participants in ongoing cash balance plans who separate from
employment generally have the right to receive their benefits in
annuity form, although they typically choose (with spousal consent) to
receive their benefits in lump-sum form. In most cases, the plan
defines the lump-sum amount as equal to the hypothetical account
balance.
In a cash balance plan, the interest credit may be fixed (e.g., 5%)
or based on a variable index (e.g., the yield on 30-year Treasury
securities). (Similarly, while the annuity conversion factor may be
fixed, it may also vary over time, either because the interest rate is
tied to a variable index or because the mortality assumption (e.g., the
``applicable mortality table'' under IRC Sec. 417(e)(3)) may change.)
If the plan does not use a fixed interest credit and would not qualify
under IRS Notice 96-8 (1996-1 C.B. 359) as a ``safe-harbor'' plan that
may pay out the hypothetical account balance as the present value of
the participant's benefit, it must include a method for fixing the
value of the indices in order to calculate a participant's accrued
benefit (see section III.B.1 of Notice 96-8).
When a cash balance plan terminates in a distress or involuntary
termination, the PBGC can perform its plan valuation and make its
benefit determinations in the same way it does for a traditional
defined benefit plan only if the plan's interest credit and annuity
conversion factors are fixed or if the plan provides a method for
fixing them. In the absence of fixed factors or a plan method for
fixing them, the PBGC must determine how to fix the factors.
Although the discussion in this notice focuses on interest credits
that are based on variable indices, similar issues arise with respect
to annuity conversion factors that may vary over time.
Future Annuity Payments--Following the Variable Index
A variable index presents fewer problems when the PBGC is
determining the annuity amount to actually pay a participant at the
time the participant begins to receive benefits. The PBGC can--and
anticipates that it will--track the future (actual) performance of a
variable index so that it will know, at the time a participant begins
to receive benefits, the amount of the participant's annuity benefit
under the plan and the extent to which that benefit is guaranteed.
(However, in the case of a participant whose benefit is not fully
guaranteed, how the PBGC fixes the variable index may affect the extent
to which there is funding for the nonguaranteed portion of the benefit,
as discussed under Fixing the Variable Index, below.)
Although tracking the actual performance of a variable index over
time is consistent with plan provisions, it will prevent the PBGC from
being able to tell participants before retirement exactly what they
will receive at retirement (just as it is impossible for the plan
administrator of an ongoing cash balance that uses a variable index to
provide this information to participants in advance). The PBGC is
considering what types of estimates it
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should give when communicating with participants and how often to
update these estimates.
Fixing the Variable Index
Section 4044 Valuation
Tracking the actual performance of a variable index over time is
not an option for the PBGC when it performs its plan valuation under
ERISA section 4044. This is because the PBGC must perform this
valuation as of the plan's termination date and thus cannot take into
account the actual performance of the variable index after that date.
The PBGC values each participant's plan benefit by first determining
the annuity benefit payable at retirement and then determining the
present value of that future annuity benefit as of the plan's
termination date. Thus, the PBGC must fix the variable index (i.e.,
make an assumption about the future performance of the variable index)
as of the plan's termination date to be able to determine, as of that
date, what a participant's annuity benefit will be at a future
retirement date.
Future Annuity Payments--Funding of Nonguaranteed Benefits
The way in which the PBGC fixes the variable index will not affect
the amount of a participant's annuity benefit under the plan or the
extent to which that benefit is guaranteed. However, it can affect the
section 4044 valuation, which is performed as of the plan's termination
date. That valuation, in turn, can affect the extent to which any
nonguaranteed portion of the participant's benefit is funded by plan
assets or by PBGC recoveries on its employer liability claims.
Lump Sums
The PBGC also must fix the future performance of a variable index
to determine the amounts of its (generally de minimis) lump-sum
payments. This is so because, under the PBGC's traditional methodology
for calculating lump sum amounts, it must know the amount of the
participant's future retirement benefit in order to determine the lump
sum value (based on PBGC assumptions and methods) of that benefit as of
the plan's termination date.
The need to fix the variable index would not disappear even if the
PBGC were to depart from its traditional methodology for determining
lump sum amounts and were instead to base its lump sum payments in
``safe-harbor'' cash balance plans on the amount of the hypothetical
account balance. This is because the PBGC can pay the hypothetical
account balance only to the extent it is payable under Title IV of
ERISA, i.e., guaranteed (under ERISA section 4022(a) and (b)) or funded
by plan assets (under ERISA section 4044) or by PBGC recoveries on its
employer liability claims (under ERISA section 4022(c))--determinations
that the PBGC must make as of the plan's termination date. Thus, the
PBGC will need to fix the variable index to determine the extent to
which the lump sum is payable.
Possible Methods for Fixing the Variable Index
The PBGC can fix the future performance of a variable index in a
number of ways--for example, by using a standardized PBGC value that
will apply to all plans that terminate on a given date, by making a
``best estimate'' determination for each plan termination based on
generally accepted actuarial principles and practices, by using the
index as it stood on the plan's termination date (i.e., the ``spot
rate''), or by using some ``historical average'' of the index.
Each approach would present different issues. Using a standardized
PBGC value could lead to results that would diverge significantly from
what one would expect based on the variable index a plan chose. The
``best estimate'' approach might leave too much discretion with the
PBGC. Although the ``spot rate'' approach could be viewed as consistent
with the use of the termination date as the date to determine various
rights and obligations under the termination insurance program, there
would be an issue as to whether this was the best approach where the
index was at (or near) a historic high or low or where, as in the case
of an equity index, the change in the index could be negative. And the
``historical average'' approach would raise questions as to the period
over which the variable index should be averaged and the method of
averaging. It also would raise questions as to the data's applicability
to the future, particularly where the variable index had existed for
only a short time or was volatile (e.g., a stock index).
One option that the PBGC is actively considering, in the common
case where a plan uses a variable Treasury index other than the yield
on 30-year Treasuries (e.g., the yield on one-year Treasuries), is to
combine elements of the ``spot rate'' and ``historical average''
approaches by using a ``modified spot rate'' approach. Under this
approach, the PBGC would start with the less volatile spot rate for 30-
year Treasuries and adjust it to reflect the historical difference
between the yield on 30-year Treasuries and the variable index used.
Request for Comments
The PBGC is soliciting comments on the Title IV aspects of cash
balance plans. As detailed in this notice, the PBGC is especially
interested in comments on how it should make its valuation and payment
determinations under a cash balance plan that uses a variable index to
determine benefits, and on what benefit estimates it should give
participants in such a plan. While the discussion in this notice
focuses on cash balance plans that use variable indices to determine
interest credits, the PBGC is also interested in comments on how it
should perform these tasks for cash balance plans that use annuity
conversion factors that may vary and for other plans that may raise
similar issues.
E.O. 12866 Review
The Office of Management and Budget has reviewed this notice under
E.O. 12866, Regulatory Planning and Review. However, the PBGC has not
yet determined whether there is a need to proceed by rulemaking to
address the issues raised in this notice.
Issued in Washington, D.C., this 30th day of June, 2000.
David M. Strauss,
Executive Director, Pension Benefit Guaranty Corporation.
[FR Doc. 00-17039 Filed 7-5-00; 8:45 am]
BILLING CODE 7708-01-P