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WASHINGTON -- The ERISA Industry Committee and the Pension Benefit Guaranty Corp. will meet this week to discuss a package of ERIC proposals that includes a recommendation to change the way the agency values employer pension plan liabilities.
The proposals that ERIC sent to PBGC Executive Director David Strauss earlier this month would change the way the PBGC measures its financial condition; revamp the methodology for determining fixed-rate and variable-rate premiums; and set standards for the PBGC's involvement in business transactions that the agency deems could affect pension plan liabilities.
Key to all the proposals is ERIC's recommendation that PBGC use an interest rate assumption equal to the 30-year Treasury securities interest rate plus two percentage points. Using, for example, the Sept. 8 rate of 5.3%, the interest rate assumption would be 7.3%.
Under ERIC's proposal, that assumption would be used in calculating both PBGC liabilities for terminated plans and employers' unfunded vested benefit liabilities.
The PBGC now ties the interest rate assumption for its terminated plan liabilities to the annuity market. For September, it was 5.40% for the first 25 years after plan termination and 5.25% thereafter.
Employers under current law must use an interest rate assumption of 85% of the rate on 30-year Treasury bonds to determine their unfunded vested benefit liabilities, which for employers whose plan years started in August is 4.83%.
ERIC says the current interest rate assumption is unrealistically low. Using a higher interest rate would reduce the value of PBGC's potential liabilities and lower the premium needed from employers to support the termination insurance program.
Employers with fully funded plans pay the PBGC a yearly fixed premium of $19 per plan participant. Above that base premium, employers with underfunded plans pay a variable-rate premium surcharge, which currently is $9 per $1,000 of unfunded vested benefits. Single-employer plans last year paid a total of $1.06 billion in premiums, according to the PBGC. About 15,918 plans paid the variable rate last year. PBGC cannot change the fixed-rate or variable-rate premiums without congressional action.
Under ERIC's recommendation, premium rates would be calculated using an adjustment factor that takes into account the PBGC's valuation of its liabilities and assets and a proposed reserve allowance.
ERIC is calling for a structure that would reduce employers' premium burden when the PBGC's financial condition allows but would ensure that the PBGC would be able to generate more premium when needed, according to Janice Gregory, ERIC vp. Under that structure, premiums would change only if the premium rate calculated for a given calendar year would be at least 10% higher or 10% lower than the rate for the preceding year. Furthermore, no premium change could be 25% greater than or less than the previous year.
The reserve allowance ERIC suggests would be required to provide for future unexpected plan terminations. One possible formulation of the reserve, according to the organization, is the greater of two times the 10-year average of the PBGC's annual claims or 5% of the value of PBGC's liabilities.
The package also calls for the PBGC to revise other assumptions used to value the agency's liabilities and to publish regulations, guidelines and remedies concerning when and how it will intervene in business transactions that it determines could affect pension plan liabilities.
ERIC is among the groups that have responded to the PBGC's invitation for comments in a continuation of communication launched after the agency published an advance notice of proposed rulemaking in March 1997, according to a PBGC spokeswoman.
The PBGC is reviewing the reasonableness of the actuarial assumptions in its valuation regulations, a spokeswoman said. The agency wants to continue discussions with the various groups to determine what changes, if any, are needed to the regulations, she said.