[Federal Register Volume 65, Number 130 (Thursday, July 6, 2000)]
[Proposed Rules]
[Pages 41610-41612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-17039]


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PENSION BENEFIT GUARANTY CORPORATION

29 CFR Parts 4022 and 4044

RIN 1212-AA96


Title IV Aspects of Cash Balance Plans With Variable Indices

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Request for public comment.

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SUMMARY: Many cash balance plans use variable indices to determine 
future retirement benefits. If such a plan terminates in a distress or 
involuntary termination under Title IV of ERISA, the PBGC must make 
assumptions--as of the plan's termination date--about the future 
performance of the variable index. The PBGC is soliciting public 
comment on what assumptions it should make about that future 
performance.

DATES: Comments must be received on or before September 22, 2000.

ADDRESSES: Comments may be mailed to the Office of the General Counsel, 
Pension Benefit Guaranty Corporation,

[[Page 41611]]

1200 K Street, NW., Washington, DC 20005-4026, or delivered to suite 
340 at the above address. Comments also may be sent by internet e-mail 
to <a href="/cdn-cgi/l/email-protection#522037357c313d3f3f373c262112223035317c353d24"><span class="__cf_email__" data-cfemail="057760622b666a6868606b717645756762662b626a73">[email protected]</span></a>. Comments will be available for public 
inspection at the PBGC's Communications and Public Affairs Department, 
Suite 240.

FOR FURTHER INFORMATION CONTACT: Harold J. Ashner, Assistant General 
Counsel, or Catherine B. Klion, Attorney, Pension Benefit Guaranty 
Corporation, Office of the General Counsel, Suite 340, 1200 K Street, 
NW., Washington, DC 20005-4026, 202-326-4024. (For TTY/TTD users, call 
the Federal relay service toll-free at 1-800-877-8339 and ask to be 
connected to 202-326-4024.)

SUPPLEMENTARY INFORMATION:

Overview

    The PBGC administers the termination insurance program under Title 
IV of the Employee Retirement Income Security Act of 1974 (ERISA). 
Under that program, the PBGC guarantees, subject to certain limits, the 
benefits payable by covered defined benefit plans.
    Many of the PBGC's regulations were written in the early years of 
the termination insurance program. Since that time--particularly in 
recent years--defined benefit plans have undergone significant changes 
in design. One of the more significant changes for the termination 
insurance program is the emergence of cash balance and other hybrid 
plans. These new plan designs raise novel issues for the PBGC when it 
performs valuations and determines benefit entitlements. This notice 
focuses on how the PBGC should perform these tasks in the case of a 
cash balance plan that uses a variable index to determine participants' 
benefits.

Background

    A brief explanation of the PBGC's existing valuation and payment 
rules and of certain aspects of cash balance plans may be helpful to an 
understanding of the issues raised in this notice.

Valuation and Payment Rules for Traditional Plans

    When a defined benefit plan terminates in a distress or involuntary 
termination, the PBGC allocates the plan's assets among the plan's 
participants and beneficiaries based on the priority categories 
established under section 4044 of ERISA. To do so, the PBGC must value 
the plan's benefit liabilities and the plan's assets as of the plan's 
termination date. The valuation affects the amount of the PBGC's 
employer liability claim for plan underfunding. It also affects the 
extent to which any nonguaranteed portion of a participant's accrued 
benefit is funded. (Nonguaranteed benefits may be funded either by plan 
assets under ERISA section 4044 or by PBGC recoveries on its employer 
liability claims under ERISA section 4022(c).) The PBGC performs this 
valuation by making assumptions as to the form of the benefit, when 
payments will begin (e.g., at early or normal retirement age), 
interest, mortality, etc.
    In the case of a traditional defined benefit plan, when the PBGC 
completes its valuation it generally can determine, and tell the 
participant, the amount of the annuity benefit payable (at a specified 
age, and in a specified form) under the termination insurance program. 
This is so even if retirement is many years away. (The actual amount of 
the annuity benefit may vary depending on factors such as when the 
participant chooses to start receiving the benefit and whether the 
benefit is paid in a ``joint-and-survivor'' form.) Similarly, if the 
PBGC pays a benefit under a traditional defined benefit plan in lump-
sum form (generally only when it cashes out a de minimis benefit of 
$5,000 or less), it can determine its lump-sum value (i.e., the present 
value, as of the plan's termination date, of the annuity benefit 
payable by the PBGC) as soon as it completes its valuation. The PBGC 
cannot make these determinations as easily in many cash balance plans.

Cash Balance Plans

    A cash balance plan is a defined benefit plan that defines a 
participant's retirement benefit by reference to the amount of a 
hypothetical account balance. The hypothetical account balance is 
credited each year with a pay credit and an interest credit, both of 
which must be specified in the plan. A cash balance plan also must 
specify the annuity conversion factor (e.g., a factor based on 
specified interest and mortality assumptions) that it will use to 
convert the hypothetical account balance to an immediate annuity 
benefit. Participants in ongoing cash balance plans who separate from 
employment generally have the right to receive their benefits in 
annuity form, although they typically choose (with spousal consent) to 
receive their benefits in lump-sum form. In most cases, the plan 
defines the lump-sum amount as equal to the hypothetical account 
balance.
    In a cash balance plan, the interest credit may be fixed (e.g., 5%) 
or based on a variable index (e.g., the yield on 30-year Treasury 
securities). (Similarly, while the annuity conversion factor may be 
fixed, it may also vary over time, either because the interest rate is 
tied to a variable index or because the mortality assumption (e.g., the 
``applicable mortality table'' under IRC Sec. 417(e)(3)) may change.) 
If the plan does not use a fixed interest credit and would not qualify 
under IRS Notice 96-8 (1996-1 C.B. 359) as a ``safe-harbor'' plan that 
may pay out the hypothetical account balance as the present value of 
the participant's benefit, it must include a method for fixing the 
value of the indices in order to calculate a participant's accrued 
benefit (see section III.B.1 of Notice 96-8).
    When a cash balance plan terminates in a distress or involuntary 
termination, the PBGC can perform its plan valuation and make its 
benefit determinations in the same way it does for a traditional 
defined benefit plan only if the plan's interest credit and annuity 
conversion factors are fixed or if the plan provides a method for 
fixing them. In the absence of fixed factors or a plan method for 
fixing them, the PBGC must determine how to fix the factors.
    Although the discussion in this notice focuses on interest credits 
that are based on variable indices, similar issues arise with respect 
to annuity conversion factors that may vary over time.

Future Annuity Payments--Following the Variable Index

    A variable index presents fewer problems when the PBGC is 
determining the annuity amount to actually pay a participant at the 
time the participant begins to receive benefits. The PBGC can--and 
anticipates that it will--track the future (actual) performance of a 
variable index so that it will know, at the time a participant begins 
to receive benefits, the amount of the participant's annuity benefit 
under the plan and the extent to which that benefit is guaranteed. 
(However, in the case of a participant whose benefit is not fully 
guaranteed, how the PBGC fixes the variable index may affect the extent 
to which there is funding for the nonguaranteed portion of the benefit, 
as discussed under Fixing the Variable Index, below.)
    Although tracking the actual performance of a variable index over 
time is consistent with plan provisions, it will prevent the PBGC from 
being able to tell participants before retirement exactly what they 
will receive at retirement (just as it is impossible for the plan 
administrator of an ongoing cash balance that uses a variable index to 
provide this information to participants in advance). The PBGC is 
considering what types of estimates it

[[Page 41612]]

should give when communicating with participants and how often to 
update these estimates.

Fixing the Variable Index

Section 4044  Valuation

    Tracking the actual performance of a variable index over time is 
not an option for the PBGC when it performs its plan valuation under 
ERISA section 4044. This is because the PBGC must perform this 
valuation as of the plan's termination date and thus cannot take into 
account the actual performance of the variable index after that date. 
The PBGC values each participant's plan benefit by first determining 
the annuity benefit payable at retirement and then determining the 
present value of that future annuity benefit as of the plan's 
termination date. Thus, the PBGC must fix the variable index (i.e., 
make an assumption about the future performance of the variable index) 
as of the plan's termination date to be able to determine, as of that 
date, what a participant's annuity benefit will be at a future 
retirement date.

Future Annuity Payments--Funding of Nonguaranteed Benefits

    The way in which the PBGC fixes the variable index will not affect 
the amount of a participant's annuity benefit under the plan or the 
extent to which that benefit is guaranteed. However, it can affect the 
section 4044 valuation, which is performed as of the plan's termination 
date. That valuation, in turn, can affect the extent to which any 
nonguaranteed portion of the participant's benefit is funded by plan 
assets or by PBGC recoveries on its employer liability claims.

Lump Sums

    The PBGC also must fix the future performance of a variable index 
to determine the amounts of its (generally de minimis) lump-sum 
payments. This is so because, under the PBGC's traditional methodology 
for calculating lump sum amounts, it must know the amount of the 
participant's future retirement benefit in order to determine the lump 
sum value (based on PBGC assumptions and methods) of that benefit as of 
the plan's termination date.
    The need to fix the variable index would not disappear even if the 
PBGC were to depart from its traditional methodology for determining 
lump sum amounts and were instead to base its lump sum payments in 
``safe-harbor'' cash balance plans on the amount of the hypothetical 
account balance. This is because the PBGC can pay the hypothetical 
account balance only to the extent it is payable under Title IV of 
ERISA, i.e., guaranteed (under ERISA section 4022(a) and (b)) or funded 
by plan assets (under ERISA section 4044) or by PBGC recoveries on its 
employer liability claims (under ERISA section 4022(c))--determinations 
that the PBGC must make as of the plan's termination date. Thus, the 
PBGC will need to fix the variable index to determine the extent to 
which the lump sum is payable.

Possible Methods for Fixing the Variable Index

    The PBGC can fix the future performance of a variable index in a 
number of ways--for example, by using a standardized PBGC value that 
will apply to all plans that terminate on a given date, by making a 
``best estimate'' determination for each plan termination based on 
generally accepted actuarial principles and practices, by using the 
index as it stood on the plan's termination date (i.e., the ``spot 
rate''), or by using some ``historical average'' of the index.
    Each approach would present different issues. Using a standardized 
PBGC value could lead to results that would diverge significantly from 
what one would expect based on the variable index a plan chose. The 
``best estimate'' approach might leave too much discretion with the 
PBGC. Although the ``spot rate'' approach could be viewed as consistent 
with the use of the termination date as the date to determine various 
rights and obligations under the termination insurance program, there 
would be an issue as to whether this was the best approach where the 
index was at (or near) a historic high or low or where, as in the case 
of an equity index, the change in the index could be negative. And the 
``historical average'' approach would raise questions as to the period 
over which the variable index should be averaged and the method of 
averaging. It also would raise questions as to the data's applicability 
to the future, particularly where the variable index had existed for 
only a short time or was volatile (e.g., a stock index).
    One option that the PBGC is actively considering, in the common 
case where a plan uses a variable Treasury index other than the yield 
on 30-year Treasuries (e.g., the yield on one-year Treasuries), is to 
combine elements of the ``spot rate'' and ``historical average'' 
approaches by using a ``modified spot rate'' approach. Under this 
approach, the PBGC would start with the less volatile spot rate for 30-
year Treasuries and adjust it to reflect the historical difference 
between the yield on 30-year Treasuries and the variable index used.

Request for Comments

    The PBGC is soliciting comments on the Title IV aspects of cash 
balance plans. As detailed in this notice, the PBGC is especially 
interested in comments on how it should make its valuation and payment 
determinations under a cash balance plan that uses a variable index to 
determine benefits, and on what benefit estimates it should give 
participants in such a plan. While the discussion in this notice 
focuses on cash balance plans that use variable indices to determine 
interest credits, the PBGC is also interested in comments on how it 
should perform these tasks for cash balance plans that use annuity 
conversion factors that may vary and for other plans that may raise 
similar issues.

E.O. 12866  Review

    The Office of Management and Budget has reviewed this notice under 
E.O. 12866, Regulatory Planning and Review. However, the PBGC has not 
yet determined whether there is a need to proceed by rulemaking to 
address the issues raised in this notice.

    Issued in Washington, D.C., this 30th day of June, 2000.
David M. Strauss,
Executive Director, Pension Benefit Guaranty Corporation.
[FR Doc. 00-17039 Filed 7-5-00; 8:45 am]
BILLING CODE 7708-01-P


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