U.S. Forces Pension Values Down
By: Marvin Snyder
A new standard for pension values has been promulgated for defined benefit pension plans by federal law. The law generally referred to as GATT contains significant pension provisions for ERISA plans that pay monthly pension benefits. Plans subject to the Employee Retirement Income Security Act of 1974, as amended many times, must compute present values and lump sum distributions under the new procedures. The effective date for each plan is when it is amended to include the mandates, but no later than the year 2000.
Within the coming five years, all affected plans will drop their reliance on PBGC rates and use GATT rates instead. The General Agreement on Taiffs and Trades pushes away the Pension Benefit Guaranty Corporation as the arbiter of pension value interest rates.
The law provides for a standard mortality table and a reference to the interest rates which must be used. The standard mortality table is a pension annuity table developed by actuaries, denominated as "GAM 83". The development of the table began in 1983, but its mortality probability components are designed to be modern and up to date for the late 1990's. It envisions better overall mortality, longer longevity, less deaths in general than older tables. If the interest rates had not changed, the change in mortality would tend to increase values in recognition that pensioners live longer than in the past.
Note that this does not use the concept of "life expectancy"; it does not state an age at which the person will die. It uses the probability of mortality in the proper actuarial way.
The newly required interest rate structure is now going to be based on 30-year U.S. Treasury bonds. The IRS, as well as other sources, will announce monthly the pegged-rate of the U.S. Treasury "long bond", which is to be used in pension values. The derived interest rate will be expected to vary each month (but not more often than monthly), and we hope will be announced in sufficient time for valuations to be made promptly and properly, using the new standards.
Set forth below are some examples of typical results using retirement age 65.
As may be seen from the above table, the younger the person the greater the decrease in pension value under the new procedures required by GATT as compared to the PBGC rates that were in effect in the same time period. The family practice bar must now readjust thinking on pension values in divorce to be currently accurate.