As expected, the Internal Revenue Service (IRS) has issued updated mortality tables for lump-sum payments paid in plan years beginning in 2018 for defined benefit (DB) pension plans. The use of the new mortality table in 2018 will increase the value of the lump-sum payment to participants by approximately 4% to 5%, depending on the age of the participant on the date of the lump-sum payment. This new lump-sum mortality table is mandatory and cannot be delayed for lump sums paid in 2018.

Although the new mortality table increases lump sums, the 2018 lump-sum interest rates may cause the lump sum value to go up or down. The lump-sum interest rates are also published by the IRS. They are based on three segment rates. The lump sum value is derived by discounting the actual monthly benefit payments at the appropriate segment rate back to the benefit commencement date. Under IRS rules, a plan may have up to a five-month lookback when establishing the lump-sum segment rates used for lump sums paid in a plan year.

The September 2017 rates that will be used for the 2018 lump-sum payments are just slightly higher than the September 2016 rates. We do not yet have the October, November, and December 2017 segment rates, but note that September 2016 reflected the lowest segment rates for lump-sum payments in 2017. So far in 2017, the segment rates have all been lower than the December 2016 segment rates. Lower interest rates translate to higher lump sum values because the monthly benefit payments are discounted at a lower interest rate.

Even with possibly higher lump sum values in 2018, depending on interest rates, it may still be beneficial to look at lump-sum windows in DB pension plans. This is due to increasing Pension Benefit Guaranty Corporation (PBGC) premiums which are indexed each year. In 2017, single-employer PBGC premiums were $69 per participant and $34 per $1,000 of unfunded vested benefits. For 2018, single-employer PBGC premiums will be $74 per participant and $38 per $1,000 of unfunded vested benefits. This is an increase of approximately 7% in the per participant PBGC flat-rate premium and an increase of approximately 12% in the PBGC variable rate premium. Thus, especially for small vested terminated benefits, the cost of a lump-sum window may be less than the present value of the PBGC premiums. Also, annuity purchase rates continue to be low, so again the cost of a lump sum window may be less than buying annuities for vested participants that have left the employer. For both of these reasons, 2018 may be a good time to explore lump-sum windows.