journal of pension planning & compliance - Kluwer Law International

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6 / JOURNAL OF PENSION PLANNING & COMPLIANCE The simulation indicates that the company expected obligation for this prototype fund was $69,681,745. At the time, it was widely recognized that a sufficient number of firms were unable to meet the obligations as defined by the PBGC, which resulted in the PBGC incurring significant financial challenges. This simulation provides a rather artificial benchmark for measuring the impact of the future policy changes and economic condition changes that occurred during the period from enactment to the present. The second simulation considers the changes imposed by the U.S. Treasury when the yields used to evaluate pension programs were revised and the U.S. Treasury prescribed three rates to be used in determining the premium on any outstanding debt obligation. In August 2010, these rates were 2.06%, 5.10%, and 6.11% as defined above. The results of this simulation are listed in Table 3 . Employee Age Table 3. Pension Fund Value in 2010 Using 2.06%, 5.10%, and 6.11% for a Discount Rate Pension Amount Expected Pension Value Number of Employees Total Expected Value 20–under 45 $1,000/mo. $ 14,603.28 556 $ 8,119,424 45–under 60 $1,500/mo. $ 84,676.24 344 $29,128,626 60 and over $2,000/mo. $227,846.40 105 $23,923,872 $61,171,922 This simulation indicates that the new provisions for determining an appropriate discount scheme resulted in two significant findings. The total pension obligation projected by the PBGC has declined while the funding of the mature employees that are close to retirement has been relatively unchanged. Second, the initial impact of this policy change impacts younger employees as firms perceive less financial responsibility in securing the pension obligations of this age class of employees. The third simulation considers a further modification where the PBGC published rates to be utilized in determining the value of the pension obligation. These rates in August 2010 were 4.05%, 6.47%, and 6.65% as described above. Furthermore, the PBGC allows firms to utilize one set of rates to value pension obligation as well as to determine the value of outstanding debt obligation. Using this one set of rates, the results in the simulation findings are summarized in Table 4 :
WILL THE PENSION PROTECTION ACT PROTECT DEFINED BENEFIT PENSIONS? / 7 Employee Age Table 4. Pension Fund Value in 2010 Using 4.05%, 6.46%, and 6.65% for a Discount Rate Pension Amount Expected Pension Value Number of Employees Total Expected Value 20–under 45 $1,000/mo. $ 11,893.51 556 $ 6,612,792 45–under 60 $1,500/mo. $ 69,841.21 344 $24,025,376 60 and over $2,000/mo. $198,078.40 105 $20,798,232 $51,436,400 The more liberal rates reduce the pension obligations further by nearly 16% which certainly would aid the PBGC in claiming a policy success under the PPA, and the obligations are reduced clear across all pensioners. At the same time, the risk to PBGC is substantially greater, considering the economic environment and current yields on securities in the marketplace in the calendar year 2010. The consequence of the policy changes in manipulating the discount factor in evaluating pension obligations results in approximately a 25% reduction in the obligations to the PBGC for a full funding of a pension plan, according to PBGC guidelines, over a period of four years while the interest rates in the marketplace were steadily declining and the real financial obligation would be increasing. To measure the real impact that changing interest rates would have, and to protect pension interests by fully funding pension plans and minimizing risk to pensioners, rather than having the PBGC absorb risks, a fourth simulation was conducted utilizing current yields on U.S. Treasury securities maturing over the same period of years the pension fund obligations occur. This simulation estimates the “real” financial obligation required in the current market situation to properly fund the prototype pension plan with minimum marker risk. The results are summarized in Table 5 below: Employee Age Table 5. Pension Fund Value in 2010 Using Current Treasury Yields for a Discount Rate Pension Amount Expected Pension Value Number of Employees Total Expected Value 20–under 45 $1,000/mo. $ 39,853.03 556 $22,158,284 45–under 60 $1,500/mo. $123,436.90 344 $42,462,293 60 and over $2,000/mo. $277,523.40 105 $29,139,957 $93,760,534
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