Since then, the Bipartisan Budget Act of 2015 (BBA) was signed into law on November 2. BBA extended the current corridor used as the floor and ceiling for PPA rates. The range of 90% to 110% was extended for three years through 2020, when the corridor will widen annually by 5 basis points on both sides until it reaches a range of 70% to 130% for the 2024 plan year and beyond. In addition, BBA also provided the Pension Benefit Guaranty Corporation (PBGC) flat-rate premium and the variable-rate premium percentage to be used for the next several years (subject to indexing).
In order to account for these changes, we have updated our segment rates projections for the next several years. The first table below projects for 2016 to 2019, showing the 50th percentile of the 24-month average rates (assuming a calendar-year plan with no look-back period), and a range using the 5th and 95th percentile rates as endpoints for 2016 to 2019.
| Year | 2016 | 2017 | 2018 | 2019 |
| First Segment Rate | 1.41% (1.31% - 1.53%) | 1.80% (0.93% - 2.92%) | 2.25% (0.48% - 4.70%) | 2.66% (0.30% - 5.88%) |
| Second Segment Rate | 3.96% (3.88% - 4.05%) | 4.13% (3.40% - 4.96%) | 4.49% (2.95% - 6.28%) | 4.70% (2.71% - 7.14%) |
| Third Segment Rate | 4.99% (4.92% - 5.07%) | 5.16% (4.49% - 5.86%) | 5.51% (4.18% - 6.96%) | 5.68% (4.01% - 7.52%) |
As the table indicates, interest rates are expected to rise over the next several years. Short-term rates are projected to rise by as much as 125 basis points, while mid-term and long-term rates are projected to rise by about 70 basis points.
Next, the following chart provides the 50th percentile of the stochastic simulations of the greater of (1) the 24-month average rate and (2) the low end of the corridor rates through the 2019 plan year, and a range using the 5th and 95th percentile rates as endpoints for each segment for 2017 to 2019. As a reminder, the segment rate to use when calculating pension funding liabilities is the greater of the 24-month average rate and the low-end corridor rate.
| Year | 2016 | 2017 | 2018 | 2019 |
| First Segment Rate | 4.43% | 4.16% (4.15% - 4.17%) | 3.92% (3.88% - 4.70%) | 3.76% (3.65% - 4.77%) |
| Second Segment Rate | 5.91% | 5.72% (5.71% - 5.72%) | 5.54% (5.50% - 6.28%) | 5.40% (5.30% - 6.72%) |
| Third Segment Rate | 6.65% | 6.48% (6.47% - 6.49%) | 6.32% (6.28% - 6.96%) | 6.17% (6.08% - 7.52%) |
As this table indicates, and similar to what was shown in the prior blog, segment rates drop during this period despite the rise in the 24-month average rates. However, because BBA extended the narrow corridor through 2020, the projections for 2018 and 2019 look different from earlier this year. The drop in the segment rates is no longer as steep as it was in the previous analysis. Nevertheless, the projected segment rates still drop by about 50 basis points (and about 70 basis points for short-term rates). Because of this, a typical plan's effective interest rate for funding purposes drops by about 48 basis points from 2016 to 2019, which leads to an increase in the target liability of about 6%.
Based on the stochastic simulations, it would appear that the 2017 plan year segment rates have already been determined. The 5th to 95th percentile interval around the midpoint rate is within one basis point for each segment, and the 24-month average rates do not approach the BBA segment rates. In addition, it can reasonably be predicted that the 2018 rates will be the HATFA rates based on these simulations. This is due to the 24-month average rates in the first table not approaching the BBA corridor rates in the second table. While the same holds true for 2019 rates, it's harder to be reasonably confident in that statement because BBA rates continue to fall while the simulated 24-month average rates continue to rise.
Finally, as more companies are considering adding lump sum windows to cash out terminated vested participants as a way to avoid paying PBGC premiums, we wanted to take a look at where the estimated PBGC rates would be over the next several years (assuming standard premium funding target calculation). The following chart projects for 2016 to 2019, showing the 50th percentile of the one-month average rates (assuming a calendar-year plan), and a range using the 5th and 95th percentile rates as endpoints for 2016 to 2019. For 2016, we are showing the most recent curve (for October 2015). As a reminder, the yield curve used for PBGC liabilities is the PPA yield curve for the month prior to the beginning of the plan year (e.g., December curve released in January for calendar-year plans) without interest rate relief provided by BBA.
| Year | 2016 | 2017 | 2018 | 2019 |
| First Segment Rate | 1.61% | 2.23% (0.22% - 4.97%) | 2.65% (0.10% - 6.06%) | 3.02% (0.09% - 6.95%) |
| Second Segment Rate | 4.02% | 4.46% (2.73% - 6.53%) | 4.70% (2.54% - 7.28%) | 4.92% (2.44% - 7.84%) |
| Third Segment Rate | 5.03% | 5.50% (3.96% - 7.19%) | 5.68% (3.83% - 7.72%) | 5.83% (3.81% - 8.11%) |
Similar to the 24-month average, interest rates are expected to rise. But because this is only a one-month average, the range between the 5th and 95th percentiles is bigger than the range for the 24-month average. And as previously mentioned, BBA increased the rate used to calculate the variable rate premium. So despite the potential increase in interest rates and a lower liability, it is possible that the variable rate premium will increase over the next several years. It's something to keep in mind if companies want to consider ways to reign in expenses over the next several years.