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Excerpts from the PBGC Actuarial Valuation Report–2006

Excerpts from the PBGC Actuarial Valuation Report–2006

By Joan M. Weiss, FSA

Editor's Note: The 2006 PBGC Annual Performance and Accountability Report, the 2006 Annual Report of the PBGC, and the complete 2006 Actuarial Valuation Report, including additional actuarial data tables, are available under Publications at PBGC.gov.

The 2006 Pension Benefit Guaranty Corporation (PBGC) Annual Performance and Accountability Report and the 2006 Annual Report of the PBGC each contain a summary of the results of the Sept. 30, 2006 actuarial valuation. The purpose of the separate Actuarial Valuation Report is to provide greater detail concerning the valuation of future benefits than is presented in PBGC's Annual Report.

Overview

The PBGC calculated and validated the present value of future benefits (PVFB) for both single employer and multiemployer programs and of non-recoverable financial assistance under the multiemployer program. For the single employer program, the liability as of Sept. 30, 2006 consisted of:

  • $64.63 billion for the 3,673 plans that have terminated; and,
  • $17.43 billion for the 27 probable terminations

Liabilities for "probable terminations" reflected reasonable estimates of the losses for plans that are likely to terminate in a future year. These estimated losses were based on conditions that existed as of PBGC's fiscal year–end. Management believes it is likely that one or more events subsequent to PBGC's fiscal year–end will occur, confirming the fact of the loss. In addition, the liability for reasonably possible terminations has been calculated and is discussed in Note 7–Contingencies–to the financial statements on pages 43 and 44 of PBGC's 2006 Annual Report. A discussion of PBGC's single employer program exposure and net financial condition is presented on pages 6 and 7 of that report. For the multiemployer program, the liability as of Sept. 30, 2006 consisted of:

  • $2 million for 10 pension plans that terminated before the passage of the Multiemployer Pension Plan Amendments Act (MPPAA) and of which PBGC is trustee; and
  • $1,876 million for probable and estimable post–MPPAA losses due to financial assistance to 85 multiemployer pension plans that were, or were expected to become, insolvent.

Actuarial Assumptions, Methods, and Procedures

The PBGC continues to review the actuarial assumptions used in the valuation to ensure that they remain consistent with current market conditions in the insurance industry and with PBGC's experience. The actuarial assumptions that are used in both the single–employer and multiemployer valuations are presented in Table 2A on page 14 of the 2006 Actuarial Report. Assumptions concerning data that were not available are discussed in the data section of the report.

As in previous valuations, the select and ultimate interest rates used to value PBGC liabilities were derived by using an assumed underlying mortality basis and current annuity purchase prices. The interest rates so determined for the 2006 valuation were 4.85percent for the first 25 years after the valuation date and 4.82percent thereafter. For the 2005 valuation the interest factors were 5.2percent for the first 25 years and 4.5percent thereafter. These interest rates are dependent upon the PBGC's mortality assumption.

Beginning with the FY 2004 valuation, the mortality assumptions were updated by adopting the recommendations from a study by an independent consulting firm. The study recommended that, when conducting valuations for its financial statements, the PBGC use the male and female 1994 Group Annuity Mortality Tables, set forward one year, for healthy males and females. The study also recommended that continuing mortality improvements be taken into account by using Projection Scale AA to project these tables a fixed number of years. At each valuation date the fixed number of years will be determined as the sum of the elapsed time from the date of the table (1994) to the valuation date, plus the period of time from the valuation date to the average date of payment of future benefits (the duration). This is an approximation to a generational mortality table. Thus, the mortality table used for healthy lives in the 2006 valuation is the 1994 Group Annuity Mortality Table, set forward one year, projected 22 years to 2016 using Scale AA. The 22 years recognizes the 12 years from 1994 to 2006 plus the 10 year duration of the 9/30/2005 liabilities. The 2005 assumption incorporated a 22 year projection, determined as the sum of the 11 years from 1994 to 2005 and the 11 year duration of the 9/30/2004 liabilities.

The model used to determine the reserve for future administrative expenses was updated in FY 2000 based on a study by an independent consultant. The same model was used in FY 2006. The factors used in the expense reserve formula are shown in Table 2C on page 16.

Retirement age assumptions were not changed.

The Small Plan Average Recovery Ratio (SPARR) assumptions as shown in Table 2B on page 15 were updated to reflect the SPARR calculated for FY 2004 (3.42percent). The SPARRs for subsequent years are assumed to equal the FY 2004 SPARR.

We continued our ongoing efforts to improve the quality of the seriatim data and, as in other years, made various changes to improve the accuracy, speed, security and auditability of the calculations and to integrate with the evolving PBGC computer environment.

Auditors' Opinion

PBGC's 2006 financial statements have received an unqualified opinion from PBGC's auditors, Clifton Gunderson, LLP. The Present Value of Future Benefits and Nonrecoverable Future Financial Assistance and its underlying data are covered by this opinion. The auditors performed numerous tests of both data and procedures to support this opinion.

Statement of Actuarial Opinion

This valuation has been prepared in accordance with generally accepted actuarial principles and practices and, to the best of my knowledge, fairly reflects the actuarial present value of the Corporation's liabilities for the single–employer and multiemployer plan insurance programs as of Sept. 30, 2006.

In preparing this valuation, I have relied upon information provided to me regarding plan provisions, plan participants, plan assets, and other matters.

In my opinion, (1) the techniques and methodology used for valuing these liabilities are generally acceptable within the actuarial profession; (2) the assumptions used are appropriate for the purposes of this statement and are individually my best estimate of expected future experience discounted using current settlement rates from insurance companies; and (3) the resulting total liability represents my best estimate of anticipated experience under these programs.

Joan Weiss, FSA, MAAA, is chief valuation actuary with the Pension Benefit Guaranty Corporation in Washington, D.C.