Actuarial Assumptions, Methods, and Procedures

PBGC continues to review the actuarial assumptions used in the valuation to assure that they remain consistent with current market conditions in the insurance industry and with PBGC's experience. The actuarial assumptions, which are used in both the single-employer and multiemployer valuations, are presented in Table 2A. Assumptions concerning data that were not available are discussed in the data section of this report.

As in previous valuations, the select and ultimate interest factors used to value PBGC’s liabilities were derived using an assumed underlying mortality basis and current annuity purchase prices. The interest factors so determined for the 2004 valuation were 4.8% for the first 25 years after the valuation date and 5.0% thereafter. For the 2003 valuation the interest factors were 4.4% for the first 20 years and 4.5% thereafter. These interest rates are dependent upon PBGC’s mortality assumption which changed from FY 2003 to FY 2004 (see below).

Beginning with the FY 2004 valuation, the mortality assumptions were updated by adopting the recommendations from a study by an independent consulting firm. The study recommended that, when conducting valuations for its financial statements, the PBGC use the male and female 1994 Group Annuity Mortality Tables, set forward one year, for healthy males and females. This table replaced the male and female 1994 Group Annuity Mortality Tables, set forward two years, for healthy males and females used in the September 30, 2003 valuation. Changes were also made to the tables for valuing disabled lives mortality. The study also recommended that continuing mortality improvements be taken into account by using Projection Scale AA to project these tables a fixed number of years. At each valuation date the fixed number of years will be determined as the sum of the elapsed time from the date of the table (1994) to the valuation date, plus the period of time from the valuation date to the average date of payment of future benefits (the duration). This is an approximation to a fully projected table. Thus, the mortality table used for healthy lives in the 2004 valuation is the 1994 Group Annuity Mortality Table, set forward one year, projected 20 years to 2014 using Scale AA. The 20 years recognizes the 10 years from 1994 to 2004 plus the 10 year duration of the 9/30/03 liabilities. The 2003 assumption incorporated an 18 year projection, determined as the sum of the 9 years from 1994 to 2003 and the 9 year duration of the 9/30/02 liabilities.

The model used to determine the reserve for future administrative expenses was updated in FY 2000 based on a study by an independent consultant. The same model was used in FY 2004. The factors used in the expense reserve formula are shown in Table 2C.

Retirement age assumptions were not changed.

The SPARR (Small Plan Average Recovery Ratio) assumptions as shown in Table 2B were updated to reflect the SPARR calculated for FY 2002 (9.60%). The SPARRs for subsequent years are assumed to equal the FY 2002 SPARR.

A major accomplishment in fiscal year 2004 was the completion of our work in time to meet the accelerated (November 15) deadline for PBGC’s financial statements. We note a major change in calculation procedure for FY2004. For both the single-employer and multiemployer probable plans, we developed a standard rate of return calculation program. The program computes annualized rates of return between two dates based on the blend of stocks and bonds the user selects. The calculation system was modified to use this program when calculating asset rate of returns.

Additional enhancements in FY2004 included the addition of both a general cash flow projection capability and a computerized system to track the receipt of multiemployer information. We continued our ongoing efforts to improve the quality of the seriatim data and, as in other years, made various changes to improve the accuracy, speed, security and auditability of the calculations and to integrate with the evolving PBGC computer environment.

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