<<How is the 4.5% used / arrived at ? >>

I don't know how PBGC arrives at the interest rate. You might check out their home page at "www.pbgc.gov". I believe it is used as follows:

Multiply the probability that you will be alive by a discount factor for each year. Multiply the result by the annual pension. Do this for each year into the future until the amount for the year is less than one dollar. Add all of the yearly amounts and the result is your lump sum. The discount factor for each year is calculated from the interest rate.

The simple annuity formula that uses the interest rate, annual pension and a life expectancy will give a fair approximation of the lump sum, probably within about 10%.

Regards, Jim