10-22-09: PBGC Pension Calculation Methodogy
- Published: Saturday, 24 October 2009 11:54
Prepared by John MacBain for DSRA members
This will give some flavor as to the PBGC methodology applied to your pensions. In the case of someone without an early retirement pension, you will be able to determine rather closely your PBGC pension if you couple this information with the Delphi pension calculation spreadsheet already posted by the DSRA (Delphi Retirement Calculation Spreadsheet). For people with an early retirement supplement, it is not possible to convey precise numbers in a spreadsheet, but this note will give you a roadmap.
The PBGC is basing all pension estimates on the guaranteed pension amounts. This is independent of the level of funding in the Delphi pension fund and/or any monies the PBGC will be able to acquire from Delphi.
In plans where funding of the pension permits, pension payments may exceed the guaranteed amounts.
There has been much discussion of the allocation categories for pension funding used by the PBGC. Please understand that these categories are completely irrelevant to the computation of the guaranteed pension level for each individual. Further, these fund allocations are also completely irrelevant to your eventual pension check unless the PBGC collects sufficient funding from Delphi to be able to pay some individuals more than their guaranteed amounts. The guaranteed pension is always paid regardless of the level of funding in the pension plan for cases when the plan is not sufficiently funded to pay more.
Level Payment Pensions – those without an Early Retirement Temporary Supplement
This section targets the PBGC methods for those who will receive level pension payments. This includes everyone except those with 30+ years and /or 85 points prior to August 1, 2009. This section will cover both straight single life pensions and spousal annuities.
1) Compute your Delphi pension for retirement at the desired retirement date using Delphi rules as per the DSRA spreadsheet. Please remember that eligibility time for early retirement benefits ceased accruing on August 1, 2009, so if you were not qualified for early retirement (10+ years and age 60) prior to August 1, then you will never qualify.
2) The first PBGC limit test is the Accrued at Normal test. This means the portion of your pension guaranteed by the PBGC cannot exceed what your pension would be at normal retirement age, age 65 – all by Delphi pension rules. This will have no effect on you, as this would typically only impact those with early retirement supplements (who will be discussed later and for whom this section does not apply).
3) The second PBGC limit test is the age test. Using the 2009 PBGC age limit chart, look up your age (years and months) when you expect to retire. This dollar amount is the maximum the PBGC guarantees. This is the Maximum Guaranteeable Benefit, the MGB.
4) The third limit test relates to the phase-in rule for changes in the pension in the past 5 years. This will have no effect on most DSRA members, as the only changes in the Delphi pension in the past five years probably affects only extremely highly compensated individuals – the range of over $200K was tossed out as representative.
5) Your PBGC pension, if you choose a straight single-life annuity, will be the resulting amount per month for the balance of your life.
Spousal Annuity Option for Those without an Early Retirement Temporary Supplement
The Delphi pension plan offered a somewhat complex 65% spousal survival annuity with a bump-up if the spouse dies first. The PBGC computes what they would guarantee if you wish to choose this option with these steps.
1) Compute the pension for the spousal annuity using Delphi rules.
2) Compute the Maximum Guaranteeable Benefit (MGB) for this annuity. This is somewhat like steps 2), 3), and 4) above but more complex. Now, in addition to the participant’s age, the calculation also involves the spouse’s age and the % pullback required to fund the annuity (there is risk involving two lifespans being insured rather than one). The MGB will be lower than that for a straight single-life annuity. The goal here is to achieve a pension payment level that has roughly the same present value on the retirement date as the straight single-life annuity option.
3) For those who are new retirees under the PBGC, other spousal annuities are available. The PBGC computes these pension rates by adjusting the Delphi 65% annuity rate appropriately. It is not a straightforward computation, for the Delphi 65% annuity has a bump-up provision if the spouse dies first, and the PBGC options do not. Once again, the goal is to offer a pension with the same present value as the guaranteed straight single-life annuity.
Early Retirement Supplements
This section is for those with 30+ years and /or 85 points prior to August 1, 2009. The methods used by the PBGC to establish the guaranteed pension level are described. Unfortunately, it is not possible to convey exact formulas for this complex computation.
For those with an early retirement supplement, the supplement is paid until age 62. Part B is reduced to the age of retirement. Part A is reduced to the age of retirement, but becomes unreduced at age 62 when the supplement goes away.
1) Compute your Delphi pension for retirement at the desired retirement date using Delphi rules as per the DSRA spreadsheet.
2) The first PBGC limit test is the Accrued at Normal test. This means the portion of your pension guaranteed by the PBGC cannot exceed what your pension would be at normal retirement age, age 65 – all by Delphi pension rules. Basically, look at the reduced pension at retirement age plus the supplement at retirement age. This cannot exceed what your Delphi pension (Delphi rules) would be at age 65. So, it is possible that part or all of the supplement can be guaranteed. Reduce your payment pre-62 to this level if your payment would be above the Accrued at Normal level.
3) This adjusted Delphi pension which has two levels of payment, one prior to age 62 and one after the 62nd birthday, is converted to a single level payment pension of equal present value. This is done using a “level life factor” – hence, LLF. This is a factor prescribed by ERISA in law and it depends on your age and other factors.
a. If your pension would have been higher before age 62 than after, then multiply the LLF times the size of the pension step and add this positive number to the post 62 pension value.
b. If your pension would have been lower before age 62 than after, then multiply (1-LLF) (one minus LLF) times the pension step and add this positive number to the pre 62 pension level.
c. Either way, you will end up with a level pension someplace between your pre-62 and post-62 payments under Delphi rules. This level pension will have the same present value as the supplemented pension coming from Step 2.
4) The second PBGC limit test is the age test. Using the 2009 PBGC age limit chart, look up your age (years and months) when you expect to retire. This dollar amount is the maximum the PBGC guarantees. This is the Maximum Guaranteeable Benefit, the MGB. This is a ceiling for the “level equivalent value” pension from step 3.
5) The third limit test relates to the phase-in rule for changes in the pension in the past 5 years. This will have no effect on most DSRA members, as the only changes in the Delphi pension in the past five years probably affects only extremely highly compensated individuals – the range of over $200K was tossed out as representative. This would be applied to the “level equivalent value” pension coming out of step 4.
6) Now consider the “level equivalent value” pension coming out of step 5. Compare this to the “level equivalent value” pension from step 3. For the sake of discussion, let us say it has been reduced by 25%. Your reduction factor is 25%.
7) Now return to the two level supplemented pension coming from Step 2. Reduce both the pre-62 and post-62 payments levels by your reduction factor, 25% in this case. This will be your PBGC guaranteeable pension.
Discussion Concerning Employee Contributions
This section will address a number of factors relating to employee contributions. The attempt is to clarify the reality of what is happening. To the best of my understanding, this applies only to new retirees or those who will not retire until sometime in the future.
> Are my contributions mine?
Yes, your contributions are yours and they can be withdrawn as described below. But, please be aware, your contributions did form a portion of the plan assets of the Delphi pension. As such, they were integral in determining the ultimate value of the annuity we call our pension. As such, a withdrawal will affect the value of your pension. (Our pension, and/or the three portions thereof, are annuities. They just were not fully funded annuities.)
> If I withdraw my contributions, what will I receive?
You will receive your contributions with interest. The interest rate paid under the Delphi plan was determined by the plan and law. The PBGC will apply interest after August 1. The withdrawal is either all or nothing.
> How do I know the impact of a withdrawal in my particular situation?
The PBGC has recently started providing two sets of estimates on pensions, one with a withdrawal and one without a withdrawal.
> What are the options on withdrawing contributions?
If you are retiring, then you can withdraw your funds at that time. The PBGC has not yet determined policy for withdrawal elections at other times, but this information will be forthcoming. So, for new retirees, the election time will be in making the choice of the annuity style you choose from the PBGC with or without a withdrawal of contributions.
> How will a withdrawal of my contributions from the PBGC affect my guaranteed pension level from the PBGC?
The PBGC computes the guaranteed pension. Then, for the chosen form of pension, the PBGC computes the equivalent monthly payment for the annuity resulting from those contributions. This monthly amount is then subtracted from the PBGC guaranteed pension payment if you withdraw your contributions.
The PBGC is governed by the Delphi plan rules, law, and PBGC policy in determining the annuitized value associated with your contributions. Generally, this should be similar to what is available in the marketplace for purchasing an annuity. The participant, when making the decision, should shop the marketplace to see the level of annuity the contributions would purchase on the open market as a comparison when making a withdrawal decision.
> Why does allocation PC2 not include all Part B benefits?
Part B Primary is determined by a formula based solely on your contributions. However, Part B Primary was not solely funded by your contributions. Those portions of Part B Primary funded by Delphi would have gone to PC3 and PC4. All of Part B Supplemental was funded (or should have been funded) by Delphi and, as such, would go into PC3 and PC4. Please remember that the allocation categories are largely irrelevant to our pensions unless the PBGC extracts sufficient funds from Delphi to permit some to be paid pensions exceeding his or her guaranteed pension level.
> Did Delphi actually buy an annuity for part B?
Some plans do buy annuities on the open market. Delphi apparently did not. There may be confusion in terms here, for each portion of our pension is indeed an annuity. The terminology is problematic, for a pension is a promised annuity that is not necessarily fully funded. An annuity purchased from an insurance company is fully paid up front.