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PBGC to Adopt Updated Mortality Table

December 01, 2005

WASHINGTON - Mortality assumptions used by the Pension Benefit Guaranty Corp. will be more closely aligned with the best practice of private insurers when the agency adopts an updated mortality table on January 1, 2006. The PBGC's new final Text version of regulationregulation on mortality assumptions will be published December 2 in the Federal Register.

The PBGC calculates the liability of terminating underfunded pension plans by matching the price that a private insurer would charge to assume the obligation. Mortality assumptions help determine how long a pension plan participant will receive benefits and are a key element in these calculations. The PBGC combines its mortality assumptions with private-sector annuity prices to derive an interest factor that produces the present value of future benefits.

Since 1993, the PBGC has based its mortality assumptions on GAM-83, a group annuity mortality table that reflects experience before 1983. For pricing purposes, a majority of private insurers have since adopted a version of GAM-94, which reflects recent improvements in life expectancy. Because the mortality component was based on outdated information, the PBGC's derived interest factor has been lower than would otherwise be the case. The agency estimates that its interest factor will rise by 50-100 basis points when it adopts GAM-94 in January.

The PBGC will use GAM-94 projected into the future to take into account expected improvements in mortality. Mortality will be projected to the year of the benefit valuation plus an additional 10 years to approximate the duration of liabilities in terminating plans. Pension plan valuations based on projections of mortality improvement are more accurate than valuations that do not use projections, which understate liabilities.

PBGC's liability calculations are used to determine the claim the agency files in bankruptcy against sponsors of terminating pension plans. The updated mortality assumptions are not expected to cause a significant change in the agency's overall claims amount because the agency will adjust its interest factor accordingly. The updated mortality assumptions will also be used by employers when submitting information on benefit liabilities to the PBGC under section 4010 of the Employee Retirement Income Security Act.

The PBGC is a federal corporation created by the Employee Retirement Income Security Act of 1974 to guarantee payment of basic pension benefits earned by workers. Its two insurance programs cover nearly 44.1 million American workers and retirees participating in more than 30,000 private-sector defined benefit pension plans, including some 1,600 multiemployer 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. 06-08