A five-year average interest rate already in use to calculate benefits of terminated cash balance plans that had used variable interest rates will be made official under a proposed Pension Benefit Guaranty Corp. rule.
Determining a fixed interest rate at the time of plan termination “makes our job easier, and it provides greater clarity to participants,” said a PBGC official who declined to be identified. “Before this, we couldn’t tell a participant what their benefit was going to be, and we couldn’t calculate our costs accurately.”
The new approach for valuations of plans with variable rates was dictated by the 2006 Pension Protection Act. The PBGC has used the five-year average since the PPA was first enacted, but the proposed rule will make that practice official following a 60-day comment period.
Since 1996, the PBGC has taken over 50 cash balance plans, many of which used the variable interest rate.