That was one conclusion of new Congressional Research Service (CRS) research which calculated the approximate size of DB lump sums issued under the PPA rules.The CRS worked out the p resent value of an immediate annuity of $12,000 per year for participants age 65, 60, and 55 and the present value of a deferred annuity of $12,000 per year for ages 60, 55, and 50.
In each case, the CRS applied the PPA’s 2008 rules and 2012 rules. In the immediate annuity data, the CRS said (for ages 65, 60, and 55) the PPA 2008 rules result in annuity value decreases of 0.9%, 1.2%, and 1.6%, respectively, and the 2012 rules result in decreases of 9.2%, 10.8%, and 12.3%.
For the deferred annuity, the CRS determined 2008 rules result in a 0.8% decrease, a 2.6% drop, and a 3.4% decrease, respectively. After applying the 2012 rules, the CRS said, the deferred annuity values decrease by 11.6%, 20.7%, and 25.3%.
As the CRS explained, beginning in 2008, plans must use a new mortality table that reflects recent increases in life expectancy.
Using Corporate Bonds
Also, under prior law, DB plans were required to use the current interest rate on 30-year U.S. Treasury bonds to determine the minimum lump-sum annuity value. However, the PPA requires plans to use a corporate bond interest rate for this calculation. Because the present value of an annuity is inversely related to the interest rate used to convert the annuity to its present value: the higher the interest rate, the smaller the lump-sum.
As CRS pointed out, replacing the lower Treasury bond interest rate with a higher corporate bond interest rate will tend to reduce lump sums. The PPA requires the corporate bond interest rate to be phased in from 2008 to 2012. The PPA requires plans to use interest rates that will be derived from a three-segment “yield curve” of investment-grade corporate bonds in lump sum calculations.
According to the CRS report, thePPA also prohibits a DB plan from paying lump sums if the plan is less than 60% funded or if the plan sponsor is in bankruptcy and the plan is less than 100% funded.
Finally, the report said the PPA only prohibits plans from paying lump sums that are less than the amounts that would result from using the corporate bond yield curve and the new PPA mortality table.If a plan sponsor elects to use a lower interest rate, which would result in larger lump sums; the PPA requires the plan sponsor to take this higher cost into account when calculating its liabilities and funding requirements.
The result of that, CRS said, is that plan sponsors that elect to pay lump sums that are greater than those that would result from using the corporate bond yield curve will have to make additional contributions to their plans.
According to the CRS, an actuarial firm has estimated that if a plan sponsor chooses to continue using the Treasury bond interest rate to determine minimum lump-sum values, it would experience a one-time increase in plan liabilities of about 5%.