An independent actuarial group has put its stamp of approval on the assumptions used by the U.S. Pension Benefit Guaranty Corp. in estimating a record $29.1 billion deficit in its single-employer insurance program.
At issue was the pension agency's use of a 3.28 percent interest rate in calculating its obligations. The deficit estimate, first published last September, was met by criticism calling that interest rate too low.
In response, the American Academy of Actuaries completed an analysis, releasing its findings last week that the agency's estimates were reasonable.
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"The Pension Committee of the American Academy of Actuaries believes the methods and assumptions used by the PBGC produce a reasonable representation of the PBGC's current obligation and deficit," the academy's brief on the issue said.
The pension agency, which was created by Congress in 1974 under the Employee Retirement Income Security Act, is funded through premiums charged to private pension plans, returns on $85 billion is assets and from funds recovered from companies that declare bankruptcy.
The current premiums are $42 per participant plus $9 for every $1,000 of underfunded liabilities. The fees will rise in 2014 to $9 and $13 and in 2015 to $50 and $18. The agency has asked for the power to determine its own premiums, which are set by Congress. That request has gained no traction.
The Actuaries Academy, in a press release, said the interest rate was a reasonable figure to use because it sits between higher yields of corporate bonds and the lower ones associated with no-risk treasuries.
"Rising interest rates, as we are currently seeing, will lessen PBGC's deficit, but the deficit will remain substantial even with significantly higher rates," Academy Senior Pension Fellow Donald Fuerst said in a statement.
The academy also calculated that if interest rates go down 50 basis points from the assumed 32.8 percent rate, liabilities would grow by $6 billion. On the other hand, if rates rose by 100 basis points, the decrease in liabilities would be $26.5 billion.
Other factors the academy cites as key to the program's future are the rate of investment returns and underwriting experience.
PBGC officials welcomed the endorsement of its actuarial assumptions. "We're glad that a respected and independent group of experts has confirmed what we've been saying all along — the deficit is real and has been accurately stated for years," PBGC Acting Chief Policy Leslie Krammerich said.
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