One of our blog followers recently submitted a question about whether there have been any recent attempts to repeal or dramatically amend the Pension Protection Act of 2006 (PPA), which instituted the most comprehensive reform of the U.S. pension laws since the Employee Retirement Income Security Act of 1974 (ERISA) was passed. The PPA affected, and continues to affect, all varieties of retirement plans including defined benefit plans, defined contribution plans, and deferred compensation plans for executive and other highly compensated employees.
There have been no “breaking-news” attempts to repeal or gut the PPA like the ones we are hearing about with respect to the Patient Protection and Affordable Care Act, in fact, there is little news at all regarding the PPA. That being said, 2012 does mark the end of the phase-in period for the new interest rates to be used when a defined benefit plan participant elects, pursuant to the terms of the plan, for a lump sum payout when the participant quits or retires.
Beginning in 2008, the PPA modified the mortality tables and interest rates that defined benefit plans must use when calculating the minimum value of lump-sum payouts. The new mortality table, which reflects recent increases in life expectancy, went into affect in 2008. The estimates are that the change in the mortality table has or will result in increases in the value of lump-sum payouts by 1% to 2%. Prior to the PPA, defined benefit plans used the prescribed current interest rate on 30-year U.S. Treasury bonds to calculate the current lump-sum value. The PPA requires that plans now use the corporate bond interest rate to calculate such a value. The impact of interest rates on lump-sum payouts is inverse—the higher the interest rate, the smaller the lump-sum. The T-bond interest rate has been historically lower than interest rates on corporate bonds, so, in theory, this change will ultimately result in lower lump-sum payouts.
While blogging on “the actual impact of the phased-in change in interest rates to be used when calculating the minimum value of a lump-sum payout” six months from now sounds intriguing, I think I’d rather answer another blog follower’s question. Followers – thanks for following and thanks for submitting specific questions – keep ‘em coming.