Pension Benefit Guaranty Corporation.
The Pension Benefit Guaranty Corporation proposes to amend its benefit valuation regulation by adopting more current mortality assumptions Start Printed Page 12430(moving from a version of GAM-83 to a version of GAM-94). The updated mortality assumptions will better conform to those used by private-sector insurers in pricing group annuities.
Comments must be received on or before May 13, 2005.
Comments may be mailed or delivered to the Legislative and Regulatory Department, Pension Benefit Guaranty Corporation, 1200 K Street, NW., Washington, DC 20005-4026. Comments also may be submitted electronically through the PBGC's Web site at http://www.pbgc.gov/regs, or by fax to (202) 326-4112. The PBGC will make all comments available on its Web site, http://www.pbgc.gov. Copies of the comments may also be obtained by writing to the PBGC's Communications and Public Affairs Department at Suite 240 at the above address or by visiting that office or calling (202) 326-4040 during normal business hours. (TTY and TDD users may call the Federal relay service toll-free at 1-800-877-8339 and ask to be connected to (202) 326-4040.)Start Further Info
FOR FURTHER INFORMATION CONTACT:
James J. Armbruster, Acting Director, or James L. Beller, Attorney, Legislative and Regulatory Department, Pension Benefit Guaranty Corporation, 1200 K Street, NW., Washington, DC 20005-4026, (202) 326-4024. (TTY and TTD users may call the Federal relay service toll-free at 1-800-877-8339 and ask to be connected to (202) 326-4024.)End Further Info End Preamble Start Supplemental Information
The PBGC's regulations provide rules for valuing benefits in a single-employer plan that terminates in a distress or involuntary termination. (The rules are codified at 29 CFR part 4044, subpart B.) The PBGC uses these rules to determine: (1) The extent to which participants' benefits are funded under the allocation rules of ERISA section 4044, (2) whether a plan is sufficient for guaranteed benefits, and (3) how much an employer owes the PBGC as a result of a plan termination under ERISA section 4062. Employers must use these rules to determine the value of plan benefit liabilities in annual reports required to be submitted under ERISA section 4010, and may use these rules to ensure that plan spinoffs, mergers, and transfers comply with Internal Revenue Code section 414(l).
General Valuation Approach
The valuation rules prescribe a number of assumptions intended to produce reasonable valuation results on average for the range of plans terminating in distress or involuntary terminations, rather than for any particular plan or plan type. Historically, the PBGC has matched, to the extent possible, the private-sector annuity market when prescribing assumptions for valuing benefits in a terminating plan.
To determine the market cost of providing annuity benefits, the PBGC has relied upon data from periodic surveys conducted for the PBGC by the American Council of Life Insurers (the ACLI surveys). These ACLI surveys ask insurers for pricing information on group annuities. Each respondent to the surveys provides its prices (net of administrative expenses) for a range of ages for immediate annuities (annuities where payments start immediately) and for deferred annuities (annuities where payments are deferred to age 65). Prices of each of the two types of annuities are averaged at each age to get an average market price. The PBGC then derives an interest factor that, when combined with the PBGC's healthy-life mortality assumptions, provides the best fit for the average market prices (as obtained from the ACLI surveys) over the entire range of ages. The interest factor is recalibrated to the annuity survey prices each year. Each month between recalibrations, the PBGC adjusts the interest factor based on changes in the yield on long-term corporate investment-grade bonds. The interest factor is then used in conjunction with the PBGC's mortality assumptions (and other PBGC assumptions) to value annuity benefits.
These derived interest factors are not market interest rates. The factors stand in for all the many components used in annuity pricing that are not reflected in the given mortality table—e.g., assumed yield on investment, margins for profit and contingencies, premium and income taxes, and marketing and sales expenses. Because of the relationship among annuity prices, a mortality table, and the derived interest factors, it is never meaningful to compare PBGC's interest factors to market interest rates. The PBGC's interest factor is meaningful only in combination with the PBGC's mortality assumptions.
One set of assumptions prescribed by the valuation regulation relates to the probabilities that a participant (or beneficiary) will survive to each expected benefit payment date, i.e., mortality assumptions. The mortality assumptions now used by the PBGC to value benefits for non-disabled (“healthy”) participants are taken from the 1983 Group Annuity Mortality (GAM-83) Tables. The PBGC shifted to these tables in 1993, noting in its preamble to the proposed rule (at 58 FR 5129) that many private-sector insurers had shifted to the GAM-83 Tables when setting group annuity prices. The PBGC also said (at 58 FR 5129) that it intended “to keep each of its individual valuation assumptions in line with those of private-sector insurers, and to modify its mortality assumptions whenever it is necessary to do so to achieve consistency with the private insurer assumptions.” The PBGC has not updated these mortality assumptions since 1993. (There is no reason to expect that the PBGC's mortality tables under this regulation will match the tables prescribed for certain funding purposes under Treasury Regulations at any point in time. The PBGC's mortality tables are based on the mortality experience of group annuitants. In contrast, the tables to be used for certain minimum funding purposes are based on the mortality experience of individuals covered by pension plans. Group annuitants, many of whom have chosen to receive their benefits as annuities rather than as lump sums, tend to have longer life expectancies than individuals covered by pension plans.)
As noted, the ACLI periodically conducts surveys, on behalf of the PBGC, of insurers who provide group annuity contracts for information on how they price group annuities. In addition to other pricing questions, the ACLI from time to time has asked for information on which mortality tables the insurers use when pricing group annuities in pension plans. A majority of respondents indicated that, as of March 31, 2002, they use a version of the 1994 Group Annuity Mortality Basic (GAM-94 Basic) Table and project future improvements in mortality with projection scale AA. Similarly, the Society of Actuaries sponsored a survey of pricing actuaries for insurers who provide group annuity contracts and found that five of the ten respondents used a version of the GAM-94 Table. 30-Year Treasury Rates and Defined Benefit Plans, August 22, 2001, p. 5. That survey also found that most companies projected future improvements and that the most common projection scale was AA.
Based on these surveys, the PBGC proposes to use the GAM-94 Basic Table as the basis for the healthy-life mortality assumptions it uses for its valuation of plan benefits. Specifically, for a particular valuation, the PBGC would use the GAM-94 Basic Table projected to the year of that valuation plus 10 years using Scale AA. The updated mortality assumptions now being proposed will permit the PBGC to derive interest factors that, when combined with those updated mortality Start Printed Page 12431assumptions, would enable the PBGC to match the ACLI survey prices more closely across the entire range of ages than had GAM-83 been used.
The PBGC is proposing to use a projected mortality table to take into account expected improvements in mortality. In order to avoid undue complexity, the PBGC proposes to use a projected static table rather than a generational table. (A generational table takes into account expected mortality improvements but in a far more complex manner than does a projected static table.) The projection would be to the year of valuation plus 10 years as a rough approximation for the duration of liabilities in plans that terminate in distress or involuntary terminations. For example, the probability of death for a 65-year old healthy male to be used in a valuation in 2005 would be calculated as follows: .015629 × (1 − .014)(2005 −1994 + 10) = .011624. The PBGC would publish the projected mortality tables on its Web site (http://www.pbgc.gov).
Because of the way the PBGC determines its interest factors, the choice of mortality assumptions generally would have no significant effect on benefit valuations. The effect that a change in mortality assumptions would have on valuations is generally offset by the effect of the corresponding change in the PBGC's interest factors. For example, the proposed use of GAM-94 mortality assumptions would result in the PBGC's deriving higher interest factors than would the use of GAM-83 mortality assumptions (because GAM-94 has lower mortality rates than GAM-83). When those higher interest factors are combined with GAM-94, the resulting value for a given benefit would generally be about the same as it would have been had the PBGC used GAM-83 along with the lower interest factors derived from the ACLI surveys using GAM-83. (For a more detailed explanation, see the preambles to the PBGC's proposed rule published on January 19, 1993, at 58 FR 5128, and final rule published on September 28, 1993, at 58 FR 50812.)
In addition to the mortality assumptions for healthy individuals, the current regulation provides two other sets of mortality assumptions: (1) Those for participants who are disabled under a plan provision requiring eligibility for Social Security disability benefits (Social Security disabled participants), and (2) those for participants who are disabled under a plan provision that does not require eligibility for Social Security disability benefits (non-Social Security disabled participants).
As with the mortality assumptions for healthy individuals, the PBGC proposes to update the mortality assumptions used for disabled participants. For Social Security disabled participants, the PBGC proposes to use the Mortality Tables for Disabilities Occurring in Plan Years Beginning After December 31, 1994, from Rev. Rul. 96-7 (1996-1 C.B. 59). These tables were developed by the Internal Revenue Service as required by the Retirement Protection Act of 1994 amendments relating to the determination of current liability. For non-Social Security disabled participants, the PBGC proposes to use the healthy life tables projected from 1994 to the calendar year in which the valuation date occurs plus 10 years using Scale AA and setting the resulting table forward three years. In addition, in order to prevent the rates at the older ages from exceeding the corresponding rates in the proposed table for Social Security disabled participants, the PBGC proposes to cap the mortality rate for non-Social Security disabled participants at the corresponding rate for Social Security disabled participants. For convenience, the PBGC would make all of these mortality tables (like the healthy-life mortality tables) available on its Web site (http://www.pbgc.gov).
The PBGC is also proposing a clarifying change to this regulation to reflect its practice of treating a participant as a disabled participant if on the valuation date the participant is under age 65 and has a benefit that was converted under the plan's terms from a disability benefit to an early or normal retirement benefit for any reason other than a change in the participant's health status. In developing this proposed rule, the PBGC considered the comments relating to its mortality assumptions that it received in response to its notice of intent to propose rulemaking issued on March 19, 1997 (62 FR 12982). The PBGC adopted a number of the suggestions made by commenters. For instance, one commenter suggested the PBGC should not adopt a reserving table (i.e., a table that includes a built-in margin to provide a cushion for reserving purposes). Another commenter asked the PBGC to adopt a static table rather than a generational table. The tables proposed by PBGC are basic (nonreserve) static tables.
Several commenters asked the PBGC to provide mortality assumptions that vary depending on industry or workforce type or that vary on a plan-specific basis. The proposal does not adopt either of these approaches. As discussed above, the PBGC selects its mortality assumptions with the goal of achieving consistency with the mortality assumptions used by private-sector insurers for pricing group annuity contracts. To this end, ACLI respondents were asked to identify the mortality tables they used and any variations to those tables. Neither the proposed GAM 94-Basic Table, the most commonly identified table, nor any of the other tables identified by the survey respondents provided mortality assumptions that vary depending on industry or workforce type. Moreover, none of the survey respondents reported that they make modifications or adjustments based on industry or workforce type. As for the use of plan-specific mortality assumptions, the PBGC's general valuation approach is to apply a common set of assumptions (e.g., mortality, expected retirement age) to all plans with the goal of producing reasonable results on average. Shifting to a plan-specific approach for mortality would be a fundamental change that could require burdensome verification procedures. Therefore, the PBGC proposes to continue to use more general mortality assumptions that, like its other assumptions, produce reasonable results on average.
Other Changes to Valuation Regulation
The PBGC will continue to explore other ways to improve its benefit valuation regulations and may make other changes through separate rulemaking actions.
Compliance With Rulemaking Guidelines
The PBGC has determined, in consultation with the Office of Management and Budget, that this proposed rule is a “significant regulatory action” under Executive Order 12866. The Office of Management and Budget has therefore reviewed this proposed rule under Executive Order 12866. The Office of Management and Budget, therefore, has reviewed this proposed rule under Executive Order 12866.
The PBGC certifies under section 605(b) of the Regulatory Flexibility Act that this proposed rule would not have a significant economic impact on a substantial number of small entities. As explained earlier in this preamble, the effect on a plan valuation of the change in the PBGC's mortality assumptions will be offset by the effect on that plan's valuation of the PBGC's use of higher interest factors. Because of this offsetting effect, the PBGC does not expect this proposed rule to have a significant economic impact on a substantial number of entities of any size. Accordingly, sections 603 and 604 of the Regulatory Flexibility Act do not apply.Start List of Subjects Start Printed Page 12432
List of Subjects in 29 CFR Part 4044End List of Subjects
For the reasons set forth above, the PBGC proposes to amend part 4044 of 29 CFR chapter XL as follows:Start Part
PART 4044—ALLOCATION OF ASSETS IN SINGLE-EMPLOYER PLANS
1. The authority citation for part 4044 continues to read as follows:
2. Amend § 4044.52 by adding the word “and” to the end of paragraph (c), removing paragraph (d), and redesignating paragraph (e) as paragraph (d).
3. Revise § 4044.53 to read as follows:
(a) General rule. Subject to paragraph (b) of this section (regarding certain death benefits), the plan administrator shall use the mortality factors prescribed in paragraphs (c), (d), (e), (f), and (g) of this section to value benefits under § 4044.52.
(b) Certain death benefits. If an annuity for one person is in pay status on the valuation date, and if the payment of a death benefit after the valuation date to another person, who need not be identifiable on the valuation date, depends in whole or in part on the death of the pay status annuitant, then the plan administrator shall value the death benefit using—
(1) The mortality rates that are applicable to the annuity in pay status under this section to represent the mortality of the pay status annuitant; and
(2) The mortality rates under paragraph (c) of this section to represent the mortality of the death beneficiary.
(c) Healthy lives. If the individual is not disabled under paragraph (f) of this section, the plan administrator will value the benefit using—
(1) For male participants, the rates in Table 1 of Appendix A to this part projected from 1994 to the calendar year in which the valuation date occurs plus 10 years using Scale AA from Table 2 of Appendix A to this part; and
(2) For female participants, the rates in Table 3 of Appendix A to this part projected from 1994 to the calendar year in which the valuation date occurs plus 10 years using Scale AA from Table 4 of Appendix A to this part.
(d) Social Security disabled lives. If the individual is Social Security disabled under paragraph (f)(1) of this section, the plan administrator will value the benefit using—
(1) For male participants, the rates in Table 5 of Appendix A to this part; and
(2) For female participants, the rates in Table 6 of Appendix A to this part.
(e) Non-Social Security disabled lives. If the individual is non-Social Security disabled under paragraph (f)(2) of this section, the plan administrator will value the benefit at each age using—
(1) For male participants, the lesser of—
(i) The rate determined from Table 1 of Appendix A to this part projected from 1994 to the calendar year in which the valuation date occurs plus 10 years using Scale AA from Table 2 of Appendix A to this part and setting the resulting table forward three years, or
(ii) The rate in Table 5 of Appendix A to this part.
(2) For female participants, the lesser of—
(i) The rate determined from Table 3 of Appendix A to this part projected from 1994 to the calendar year in which the valuation date occurs plus 10 years using Scale AA from Table 4 of Appendix A to this part and setting the resulting table forward three years, or
(ii) The rate in Table 6 of Appendix A to this part.
(f) Definitions of disability.
(1) Social Security disabled. A participant is Social Security disabled if, on the valuation date, the participant is less than age 65 and has a benefit in pay status that—
(i) Is being received as a disability benefit under a plan provision requiring either receipt of or eligibility for Social Security disability benefits, or
(ii) Was converted under the plan's terms from a disability benefit under a plan provision requiring either receipt of or eligibility for Social Security disability benefits to an early or normal retirement benefit for any reason other than a change in the participant's health status.
(2) Non-Social Security disabled. A participant is non-Social Security disabled if, on the valuation date, the participant is less than age 65, is not Social Security disabled, and has a benefit in pay status that—
(i) Is being received as a disability benefit under the plan, or
(ii) Was converted under the plan's terms from a disability benefit to an early or normal retirement benefit for any reason other than a change in the participant's health status.
(g) Contingent annuitant mortality during deferral period. If a participant's joint and survivor benefit is valued as a deferred annuity, the mortality of the contingent annuitant during the deferral period will be disregarded.
4. Revise Appendix A to part 4044 to read as follows:
Appendix A To Part 4044—Mortality Rate Tables
The mortality tables in this appendix set forth for each age x the probability qx that an individual aged x (in 1994, when using Table 1 or Table 3) will not survive to attain age x + 1. The projection scales in this appendix set forth for each age x the annual reduction AAx in the mortality rate at age x.
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Issued in Washington, DC, this 8th day of March, 2005.
Bradley D. Belt,
Executive Director, Pension Benefit Guaranty Corporation.
[FR Doc. 05-4950 Filed 3-11-05; 8:45 am]
BILLING CODE 7708-01-P