Since MAP-21 became law in July 2012, actuarial and investment professionals have toiled to piece together a reasonable estimate for the newly established 25-year average segment rates. At that time, the IRS had only provided segment rates back to 2005, and no single authoritative corporate bond data was available to fill in the remaining years.
An estimate of the 25-year average was necessary to update asset/liability forecasts and possibly revise DB investment strategies. By August 2012, the IRS released the 25-year average segment rates in time to be used for 2012 valuations, but the underlying data used to calculate the average (each of the 25 individual years before then) were notably absent in the release.
Given the tight timeline under which the IRS was operating, it was not really surprising that more detail was not provided at the time. However, for those of us that regularly forecast DB liabilities, not having the individual rates added a small layer of uncertainty to our projections. While we routinely estimate future interest rates, it is unusual to approximate historical interest rates. Adding to the uncertainty was the IRS’s hint in Notice 2012-55 that after 2012 they may change the methodology used to determine the 25-year average, making the 2012 MAP-21 rates less reliable as a guide.
Fast forward to February 11, earlier this week, when the IRS released Notice 2013-11. In the Notice, the IRS furnished the 2013 version of MAP-21 rates for funding valuations. Its release was expected. But as an added bonus, the IRS provided the individual segment rates for each of the last 25 years (not just the average, as had been provided previously), giving us a much clearer picture for what MAP-21 rates will look like for 2014, 2015, and beyond.
Beyond its utility with liability projections, the individual historical segment rates may also be of interest to see how rates have evolved over the last 25 years, as shown in the chart below. Note that each of these points is a 24-month average, which smoothes out some of the rate volatility we are otherwise accustomed to seeing. While most have a sense for the gradual decline of corporate discount rates since the 1980’s, the rates released by the IRS paint an interesting picture on the relative volatility of each of the individual segment rates.
Source: IRS Notice 2013-11
Bob Collie describes some recent research on the funding and investment implications of MAP-21 in a separate blog posting.
As a side note, the IRS releases segment rates monthly, but the 25-year average is only calculated annually (effective for the entire year). The 25-year average is based on segment rate data through September of the previous calendar year. Therefore, going forward we should expect the 25-year average to be released sometime in the fall. 2013 was a notable exception since before now, IRS-issued segment rates going back 25 years did not exist.
For more details on MAP-21 and its implications, see “DB plan funding after MAP-21”.