New PBGC Rate Structure Announced

By: Marvin Snyder

For those of us who use the rates and factors of the Pension Benefit Guaranty Corporation (PBGC) to compute present values of pensions as marital property, the federal government requires a structural change in the construction of the rates for the first time in almost twenty years. PBGC has changed its mortality table and the length of time periods over which interest rates are measured as well as a substantial change in the internal rate generation formula.

For those readers who are confused by the leading paragraph of this DIVTIPS, some examples should clarify the point, using retirement age 65.

The official announcement of the new PBGC structure appeared in the Federal Register of September 28, 1993. It is codified at 29 CFR parts 2619 and 2676. The monthly notice made available by PBGC by subscription or by calling the hot line at (202) 326-4041, will be more complicated than before. The monthly notice to look for is the announcement of annuity rates for valuations occurring in the month (or the following month). The PBGC rate structure starts out with two interest rates, the second following the first after a twenty-five year period. For example, for January 1994, it is 5.90% for the first 25 years followed by 5.25% thereafter. So an individual aged 42 would have a pension value computed with a discount of 5.90% from ages 42 to 67, and then 5.25% thereafter using the PBGC mortality table (which has been revised also). Each month, each of the interest rates is subject to change, as is the period of time of 25 years. PBGC has said that it remains committed to rates and factors that are representative of real economic conditions. This new rate structure will tend to produce lower present values in 1994 than in 1993 for a given matter, in line with commercial annuity pricing for fair market value.