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News & Policy

PBGC Seeks Public Comment on How to Value Cash Balance Plans with Variable Indices

July 05, 2000

In a notice that will appear in the July 6, 2000, Federal Register, the Pension Benefit Guaranty Corporation (PBGC) seeks public comments on how the agency should deal with certain valuation issues raised by terminated cash balance pension plans with variable indices. Comments are due to PBGC by September 22, 2000.

A cash balance plan generally defines a participant's benefit in terms of a hypothetical account balance. This balance is credited each year with a pay credit and an interest credit, which the plan specifies. The plan also specifies the annuity conversion factor it will use to convert the hypothetical account balance to an annuity benefit. The interest credit and annuity conversion factor may be fixed as a specific number or based on a variable index, such as the yield on 30-year Treasury securities.

When PBGC assumes responsibility for a terminated cash balance plan, the agency can value benefits the same as it does for traditional defined benefit plans only if the cash balance plan's interest credit and annuity conversion factors are fixed. In the absence of fixed factors or a plan method for fixing them, PBGC must determine which of several possible methods to use to fix the factors. For example, the agency could use a standardized PBGC value that would apply to all plans terminating on a given date, make a "best estimate" determination for each plan termination based on generally accepted actuarial principles and practices, or use the index as it stood on the plan's termination date or some historical average of the index.

PBGC is requesting public comment on how it should make these determinations and on any other Title IV issues that cash balance and other hybrid plans raise.

PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974 to guarantee payment of basic pension benefits earned by about 43 million American workers and retirees participating in nearly 40,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and investment returns.

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PBGC No. 00-32