PBGC Comments on FASB Market-Return Cash Balance Proposal

The Pension Benefit Guaranty Corporation (PBGC) has submitted comments to the Financial Accounting Standards Board (FASB) regarding topic 715-30, Discount Rate Used to Measure the Benefit Obligation for Certain Market-Return Cash Balance Plans. A market-return cash balance plan uses the actual return on plan assets for the interest crediting rate in determining plan benefits and costs. But under the current accounting standard, future pension payments are generally discounted using corporate bond yield rates which may not be indicative of the financial status of a market-return cash balance plan. FASB's proposal strives to align benefit obligations with hypothetical account balances by requiring that the assumed interest crediting rate be used as the discount rate when measuring the benefit obligation of qualifying plans.

While PBGC supports FASB's initiative, they provide a few suggestions.

• Recommend that the Board clarify that the proposed amendments apply only to the portion of a plan’s benefit obligation attributable to qualifying market-return cash balance accounts.

• Recommend that it consider a de minimis exception, allowing an entity to apply the proposed measurement approach to the entire benefit obligation when obligations other than those attributable to qualifying market-return cash balance accounts represent an insignificant portion of the plan’s total benefit obligation.

• Recommend that the Board clarify that the requirement that “participants have the option to elect lump-sum payments” is satisfied only when participants may elect a lump-sum distribution of the entire balance of their market-return cash balance accounts.

• Recommend that the Board consider further restricting the application of this provision to plans where “Participants have the effective option to elect lump-sum payments” (i.e., plan is not underfunded).