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News & Policy

PBGC Seeks Comments on the Valuation of Lump Sum Benefits

October 26, 1988

The Pension Benefit Guaranty Corporation (PBGC) is seeking public comment on whether it should change the assumptions it uses to calculate single, lump sum pension payments made to participants or beneficiaries in pension plans taken over by the agency.

In an advance notice of proposed rulemaking in the October 26, 1998, Federal Register, PBGC said that it is considering, after the year 2000, replacing the assumptions it now uses in calculating lump sum payments with a modified version of the assumptions it uses in calculating benefits paid as an annuity. The modified version would use the unisex mortality table published by the Internal Revenue Service for use by private plans in calculating lump sums.

PBGC is also considering whether or not to continue to calculate and publish the lump sum rates if it discontinues their use.

"I am very aware that many people use the PBGC lump sum rates and I want to make sure that we hear from them before we make any decisions," said PBGC Executive Director David M. Strauss.

PBGC is asking for comments on the impact of such changes on pension plans and on the lead time needed by them before PBGC implements any changes. The advance notice also notes that these changes may raise tax qualification issues for some plans, and requests, on behalf of the Internal Revenue Service, that comments on these issues be sent to IRS.

In 1993, PBGC updated the assumptions it uses in calculating payments made on an annuity basis. This was done to reflect a more current mortality table (GAM-83), which also required the use of higher interest rates. However, PBGC did not update the assumptions it uses in calculating lump sums because of the effect it would have had on private sector plans, which used the PBGC interest rates to value lump sum payments. The Retirement Protection Act of 1994 eliminated the connection between the PBGC lump sum interest rates and private sector lump sums, effective in the year 2000.

In a separate notice in the October 26, 1998 Federal Register, PBGC is also seeking comments on a proposal to simplify how it calculates benefits for the purpose of allocating the assets of plans it has taken over. The allocation of plan assets is used to determine the amount of PBGC's claims against plan sponsors for pension underfunding.

Currently, PBGC uses two sets of assumptions for these allocation purposes -- one for calculating benefits to be paid as annuities and another for benefits payable as lump sums. Under the proposed amendment, PBGC would use the annuity assumptions regardless of the form in which the payment is made. Separate assumptions would still be used for purposes of paying lump sums.

Comments to PBGC must be received on or before December 28, 1998, and may be mailed or sent by Internet e-mail to PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974 to guarantee payment of basic pension benefits earned by some 42 million American workers and retirees participating in about 45,000 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. 99-02