CBS Pension Update November 13, 2007
From: CBS Human Resources
To: Harry Isaacs
Date: November 13, 2007
Re: Pension Protection Act – Lump
Sum Calculation Basis
The Pension Protection Act of 2006 (PPA) includes, among other things, comprehensive pension reforms regarding pension plan funding as well as restrictions on benefit improvements and lump sum distributions based on a pension plan’s funding level. The PPA provisions related to pension funding are generally slated to take effect on January 1, 2008.
The CBS Combined Pension Plan (CCPP) is funded above the PPA requirements that restrict payments on lump sums. However, the PPA also introduces a new required basis for calculating lump sum benefits. Currently the terms of the CCPP provide that lump sums be calculated using an interest rate based on the yield of 30-year Treasury bonds and the mortality table specified by the IRS. On November 6, 2007 the IRS announced the new required mortality table for calculating lump sums. This new mortality table along with new required interest rate guidelines issued by the IRS in October 2007 must be phased in over five years beginning with lump sum distributions with benefit commencement dates of January 1, 2008.
CBS has evaluated the effect the new required PPA interest rate and mortality table basis will have on lump sum values versus the current interest rate and mortality table basis. To phase in the new interest rate basis, in 2008 the PPA allows for an 80%/20% blend of the current interest rate basis and the new interest rate basis. Below you will find a table showing the comparison as of January 1, 2008 of the current interest rate and mortality table basis versus the PPA’s interest rate and mortality table basis using the 80%/20% blend for retirement eligible participants.
Age |
Ratio of PPA Basis to Current Basis |
55 |
97.13% |
60 |
98.32% |
62 |
98.78% |
65 |
99.25% |
As an example, if an employee is 60 years old and was due a lump sum benefit of $150,000 on January 1, 2008 under the current basis, that same employee now will be due a lump sum of $147,480 under the PPA basis (or 98.32% of the lump sum determined under the current basis).
For employees age 40-54 the ratios range from 92.35 % to 96.87% (reductions of 7.65% to 3.13% versus the current basis).
The ratios shown above apply for January 1, 2008 benefit commencement dates. It is important to note that both the current and post-January 1, 2008 PPA bases for lump sum calculations use interest rates with a four month look-back that change monthly (e.g., January interest rates are based on rates published in September); therefore, just as in 2007, interest rate changes in 2008 can create smaller or larger lump sums each month. However, these monthly adjustments ensure that employees’ lump sum distribution amounts are calculated to reflect recently available rates of return.
Some important facts to remember:
- Employees who elect to take their pension as a monthly life annuity or any alternative form of payment other than a lump sum are not affected.
- The change in the lump sum calculation basis is mandatory based on the Pension Protection Act of 2006.
- To receive a pension distribution, employees must have a bona fide termination of employment, with no guarantee of re-employment, and must complete the required retirement application forms.
- As the PPA interest rate and mortality basis for calculating lump sums is phased in over five years, the blend of current versus new interest rates will adjust 20% each year until 2012 when the phase in of the new basis is complete.
- To put this change into perspective, under the current basis, fluctuation due to changes in interest rates in 2007 has resulted in changes in lump sum values up to 15% for ages 40-54 and 9% for ages 55-65.
If an employee wishes to take distribution of a lump sum benefit calculated under the current basis to avoid PPA implications, that employee must terminate from the Company no later than November 30, 2007. This termination must be a complete and bona fide separation from service (no part-time, per diem or free-lance service post-November 30, 2007, and no promise of re-employment). Employees must also contact the Benefits Access Center (BAC) at 1-800-581-4222 by November 21, 2007 to request a retirement kit to ensure timely processing of their lump sum benefit. While we realize the timeframe for making this decision is brief, the IRS did not release final guidance for these calculations until last week and has not delayed the January 1, 2008 implementation date. The Company has moved as quickly as possible to complete the impact studies and distribute this information.
We trust you will find this information helpful. If you have questions, please contact Ray Hägg, Director, Global Retirement Programs at 212-975-4579. Should participants have questions, they should contact the BAC at 1-800-581-4222.
