SFA Discount Rates – Part II

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

What do you do on a rainy day? If you are in NJ, you may just decide to read through 38 ARPA/SFA applications residing on the PBGC’s website. Sounds like fun, right?

Today’s blog is a follow-up to yesterday’s post when we discussed the importance of the discount rate used for the SFA calculation. We specifically mentioned that smaller is better, and I wanted to get a sense of how many plans were submitting applications with discount rates lower than the 3rd segment (PPA) plus 200 bps that is embedded in the legislation. Well, it turns out to be quite a few – fortunately!

For instance, 25 Priority Group 1 applications have been filed. This group consists of plans that are already insolvent or were projected to become insolvent before 3/11/2022. Their actuaries did a fine job lowering the discount rate to reflect the poor (critical) funded status. In fact, all but 7 of the 25 had a discount rate lower than the 3rd segment plus 200 bps rate. The average discount rate for the 25 applications was only 3.94% and they ranged from 0% to 5.38%.

On the other hand, of the 12 Priority Group 2 plans, those plans that are expected to be insolvent within one year of the date the plan’s application is filed or those that Implemented MPRA benefit suspensions before 3/11/2021, only 1 plan had a discount rate lower than the legislation’s rate – Freight Drivers and Helpers Local Union No. 557 Pension Plan. That fund’s discount rate was a very conservative 4%. There remains only 1 Priority Group 3 submission (Central States) and given their extremely poor funded status it shouldn’t come as a surprise that they are using a 3% discount rate for SFA purposes.

Again, the lower the discount rate the greater the present value (PV) cost of those future benefits and expenses and the greater the gap when netting out current assets, future contributions, and investment earnings. I can’t imagine that these plans and their actuaries knew this legislation was forthcoming. The fact that they used such conservative discount rates is a testament to their professionalism. I suspect that most of the plans yet to file will have discount rates at or above the 3rd segment plus 200 bps rate, but I’ve been surprised before. We’ll keep you updated as additional applications are submitted. We are about to enter Summer in NJ where afternoon storms are not rare. I’ll need something to do!

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