June 6, 2024

The Pension Benefit Guaranty Corporation (PBGC) published a final rule to update the actuarial assumptions used for multiemployer pension plans. The PBGC’s regulations provide that these assumptions are used to value liabilities for purposes of determining withdrawn employers’ reallocation liability in the event of a mass withdrawal from a multiemployer plan. Multiemployer plans that receive Special Financial Assistance (SFA) pursuant to the American Rescue Plan Act must, as a condition of receiving SFA, use these interest assumptions to determine withdrawal liability for a prescribed period. Plan sponsors are similarly required to use these assumptions for additional purposes, such as determining amounts to transfer to the PBGC’s Missing Participants Program on behalf of a missing participant of terminating multiemployer pension plans.

Under the final rule, the PBGC is modifying the interest, mortality, and expense assumptions for valuing benefits to: (1) modernize the interest assumption structure by adopting a yield curve approach; (2) enable the use of market interest rates as of the date of liability measurement (i.e., the valuation date) as the basis for the interest assumption; (3) increase transparency by using a procedure based on publicly available yield curves as of the valuation date; (4) adopt a more recent mortality table along with a generational mortality improvement projection; and (5) simplify the expense assumption.

Regarding the interest assumption, the PBGC notes that its benefits valuation regulation contains an interest assumption for determining the present value of future payments, referred to as the “4044 interest assumption.” Since November 1993, the 4044 interest assumption has been expressed in a two-component structure known as “select and ultimate” in which one interest factor is assumed to be in effect for the first 20 or 25 years from the valuation date, and the other interest factor is assumed to be in effect thereafter. The PBGC publishes the interest assumption each quarter for use in the subsequent quarter. Under the final rule, the 4044 interest assumption will be structured as a yield curve to more closely replicate the actual yields on the investments backing group annuities and to better reflect “today’s actuarial practice.” Additionally, the final rule incorporates publicly available bond yield data into the methodology used to determine the 4044 interest assumption to increase transparency and base the interest assumption on bond yields as of the valuation date, or as close as practical for valuations that are not as of a month-end. The PBGC has simultaneously posted a white paper regarding the updates to the 4044 interest assumption, describing the principles and methods that should be used to create the 4044 yield curve.

Next, regarding the mortality assumption, the PBGC’s current regulations prescribe six sets of mortality tables grouped as follows: (1) tables for male and female individuals not receiving a disability benefit (healthy lives); (2) tables for male and female participants who are disabled under a plan provision that does not require eligibility for Social Security disability benefits (non-Social Security disabled); and (3) tables for male and female participants who are disabled under a plan provision requiring eligibility for Social Security disability benefits (Social Security disabled). Under the final rule, the PBGC is: (1) amending its benefits valuation regulation to replace mortality tables for healthy lives with mortality tables from the “Pri-2012 Private Retirement Plans Mortality Tables Report” published by the Retirement Plan Experience Committee (RPEC) of the Society of Actuaries in 2019; (2) replacing tables relating to mortality improvement for healthy lives with references to generational mortality improvement projections from the Mortality Improvement Scale MP-2021 Report (which the RPEC published in 2021) and prescribing their use; (3) amending the PBGC’s benefits valuation regulation to replace tables relating to mortality for Social Security disabled participants with tables derived from Social Security Actuarial Study 125 (published in August 2020); and (4) amending the regulation so that the provisions specifying assumptions for non-Social Security disabled lives refer to the healthy lives mortality assumptions.

Finally, regarding the expense assumption, the PBGC notes that certain administrative expenses are incurred by insurers in connection with the payment of benefits. These expenses include establishing plan files, reviewing plan provisions to determine benefit entitlements, setting up and updating records, processing pension applications, remitting benefits, and others. Insurers use assumptions about these expenses to price annuities. Currently, these expense assumptions are based in part on the total present value of plan benefits. Noting that its current multi-tiered expense assumptions are “too complicated” given expense assumptions’ small share of annuity pricing and the simple structure insurers typically use, the final rule aims to simplify the expense assumptions by setting the expense load assumption at $400 per participant for the first 100 participants and $250 for each participant over 100.

The final rule is effective beginning July 8, 2024. The final rule’s amendments apply to calculations where the valuation date is on or after July 31, 2024.

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