The pension protection act of 2006 modified both the mortality assumptions and interest rate used to calculate lump sums. Beginning in 2008 plans must use a new mortality table that reflects increases in life expectancy. The new mortality tables will tend to increase lump sum calculations slightly.
Under prior law DB plans were required to use the current interest rate on 30 yr U.S. Treasury bonds (GATT rate) to determine the minimum lump sum value of an annuity. The PPA requires plans to use a corporate bond interest rate for these calculations. The higher the interest rate the lower the lump sum calculation and vice versa. The PPA requires these changes to be phased in from 2008-2012.
Interest rates on corporate bonds vary greatly depending on the holding period of the bond. Short term bonds typically have lower yields then intermediate etc. This is why the PPA has mandated that a three segmented interest rate be used to calculate lump sums. The present value of the portion of the annuity that is payable within five years will be valued using a short-term corporate interest rate, (i.e., the first segment of the yield curve). The portion of the annuity that is payable in 6 to 20 years will be valued using a medium-term interest rate (the second segment), and the portion of the annuity that is payable in more than 20 years will be valued using a long term interest rate (the third segment).
A table of the current segmented PPA rates is as follows
|Month/Year||First Segment||Second Segment||Third Segment|