PBGC variable rate premium: Should plans make the switch?

September 17th, 2014 No comments

By Maria Moliterno

Moliterno-MariaMany pension plan sponsors are facing a decision on the methodology of calculating the premiums payable to the Pension Benefit Guaranty Corporation (PBGC) that may result in significant savings. PBGC premiums are made up of variable rate and flat rate premiums. Variable rate premiums are based on unfunded vested benefits (UVB). In 2014, many plan sponsors are eligible to change the methodology used to calculate their plan’s UVB. The question is: should they make the switch?

The UVB is determined by the amount that the vested liability, called the premium funding target, exceeds the fair market value of plan assets. The required variable rate premium for 2014 is $14 per $1,000 of UVB and is scheduled to increase to $24 in 2015 and $29 in 2016. The PBGC allows plan sponsors to determine UVB for purposes of calculating the variable rate premium by either:

• Using the three spot segment rates for the month preceding the month in which the plan year begins (standard premium funding target)
• Using the 24-month average segment rates as of the plan’s previously elected look-back period (alternative premium funding target)

Many plan sponsors elected for 2009 to switch to using the alternative premium funding target to avoid the volatile and low spot interest rates basis for the standard premium funding target.

Plan sponsors making the switch are locked into it for five years. After five years, the plan sponsor can switch again. If the plan sponsor doesn’t make a switch, they can stay with the current method as long as they like.

Five years later, plan sponsors who elected in 2009 to switch to using the alternative premium funding target are eligible to switch back to using the standard premium funding target. For calendar year plans, plan sponsors would need to do this in time for the PBGC premium due date of October 15, 2014. With the rise in interest rates that occurred during 2013, plan sponsors are asking themselves if they should make the switch during 2014.

To answer this question, consultants can estimate the variable rate premium amounts under both options for both the 2014 and 2015 plans. Does the plan sponsor save over the course of two years by switching methods?

Let’s look at an example for a sample plan with a UVB of $14.90 million under the alternative method and $9.75 million under the standard method for 2014:

For a calendar year plan, rates used for the standard premium funding target in 2014 are generally higher than the rates used for the alternative premium funding target; therefore, in this example, the standard premium funding target results in a lower variable rate premium for the 2014 plan year by $72,000.

Although interest rates for determining the alternative and standard premium funding target for the 2015 plan year are not yet available, if we assume the rates currently in effect stay constant through the end of the year, rates used for the alternative premium funding target are generally higher than the rates used for the standard premium funding target for the 2015 plan year. Assuming these rates are still in effect for the 2015 plan year, most plans will have a smaller premium funding target under the alternative method for 2015, resulting in a lower variable rate premium. In our example, the alternative method election would produce a more favorable result in 2014 by an amount of $33,000.

Therefore switching in 2014 to the standard premium funding target would result in a projected net savings of $39,000 over the two-year period.

Just remember, the standard method uses volatile spot interest rates. If there is another dip in the market, the plans may face higher costs under the standard premium funding target method and won’t be able to switch back to the alternative premium funding target until 2019. However, they will be happy they switched if interest rates rise but that of course is anyone’s guess!

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Google+ Hangout: Pension Funding Index, September 2014

September 16th, 2014 No comments

By Javier Sanabria

The funded status of the 100 largest corporate defined benefit pension plans deteriorated by $22 billion during August as measured by the Milliman 100 Pension Funding Index (PFI). The deficit increased from $259 billion to $281 billion at the end of July, due to a drop in the benchmark corporate bond interest rates used to value pension liabilities. August’s robust investment gain was not enough to improve the Milliman 100 PFI’s funded status. As of August 31, the funded ratio dropped down from 84.8% to 84.0%.

PFI co-author Zorast Wadia discusses the index’s latest results on this Milliman Google+ Hangout.

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Regulatory roundup

September 15th, 2014 No comments

By Employee Benefit Research Group

More retirement-related regulatory news for plan sponsors, including links to detailed information.

IRS issues pension funding stabilization guidance under HATFA
The Internal Revenue Service (IRS) has released Notice 2014-53 providing guidance on the changes to the funding stabilization rules for single-employer pension plans under the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA) that were made by section 2003 of the Highway and Transportation Funding Act of 2014 (HATFA).

To read the entire notice, click here.

House Ways and Means announces hearing on private single-employer and multiemployer pension plans
The Committee on Ways and Means will be holding a hearing on defined benefit pension plans offered by private sector employers, including both multiemployer plans and single employer plans. The hearing will take place on Wednesday, September 17, at the 1100 Longworth House Office Building, beginning at 10:15 A.M.

For more information, click here.

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Retirement plan leakage and retirement readiness

September 10th, 2014 No comments

By Kara Tedesco

Tedesco-KaraThe title alone proves opposites don’t always attract. “Leakage” means outflow and outflows in retirement plans are not easily controlled. Worse yet, the impact on a participant’s retirement readiness is a big problem. Where money goes once it leaves a retirement plan is a question with many answers, some of which lead to plan sponsors feeling concerned about plan design and the choices available to participants.

In defined contribution (DC) plans such as the 401(k), participants defer money from their paychecks into the plan. The employer may make matching or other employer contributions. Most 401(k) plans are designed to allow participants to access these deferrals, as well as their other vested monies, while actively working. This access occurs through loans, hardship withdrawals, and other in-service distributions. When participants take a loan, they pay themselves back over time. In some instances, however, a participant defaults on the loan, which automatically reduces the account balance. In the case of in-service distributions, once the money is paid to the participant, it does not come back into the plan, similarly reducing the participant account balance.

Of greater concern may be the preretirement withdrawal of an account balance upon termination of employment. Participants terminate employment for a myriad of reasons, such as to start a new career path. In a defined benefit (DB) plan, it is not uncommon to see a lump-sum window option offered to participants. Plan sponsors benefit from participants choosing the lump-sum window option just as they do when terminated participants take their money from 401(k) plans. The plan sponsor’s administrative costs associated with either type of plan are reduced.

The problem? Participant account balances that are cashed out and not rolled over to an IRA or another qualified retirement plan are subject to immediate income tax and potentially burdensome tax penalties, depending upon their age. But many participants don’t know what to do with the money and will often use it right away to satisfy an immediate financial need rather than save it for retirement. An even greater, more glaring problem is that the participant’s total projected retirement savings has been compromised. Does this mean that a participant will not achieve the suggested 70% to 80% income replacement rate? Most likely, the answer is yes, especially if the participant has no other savings outside the former retirement plan.

There is no clear answer to the leakage problem in plans. A good retirement plan design can greatly influence the behavior of its participants. It has to include and encourage regular employer and employee contributions to help build retirement accounts. Withdrawal provisions and loans in plans don’t signify poor plan design, but tighter administrative controls around the plan provisions, such as allowing only one in-service withdrawal per year, helps keep money in the plan. In addition, increased participant education has to remain a focus for employers, with a special emphasis on the benefits of taking a rollover instead of a lump-sum cash distribution.

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Corporate pension funded status drops by $22 billion in August

September 8th, 2014 No comments

By John Ehrhardt

Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest defined benefit pension plans. In August, these plans experienced a $46 billion increase in pension liabilities and a $24 billion increase in asset value, resulting in a $22 billion increase in the pension funded status deficit.

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It was a strong month of asset improvement, but there’s no counteracting record-low interest rates. Year to date, rates have swollen pension liabilities by $165 billion.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.4% median asset return for their pension portfolios, and if the current discount rate of 3.89% were maintained, funded status would improve, with the funded status deficit shrinking to $265 billion (84.9% funded ratio) by the end of 2014 and to $228 billion (87.1% funded ratio) by the end of 2015.

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GASB issues two Other Postemployment Benefit (OPEB) related exposure drafts

September 5th, 2014 No comments

By Javier Sanabria

The Governmental Accounting Standards Board (GASB) issued two Exposure Drafts regarding OPEB-related financial reporting by state and local governments. These proposed standards will significantly alter the methods used to account for postemployment OPEBs, similar to the new GASB 67/68 pension standards.

Like the pension standards, the unfunded liability will become a balance sheet item rather than a note disclosure. These proposed changes in OPEB reporting are sweeping in scope, and they will serve to increase the balance sheet liability and may significantly increase the volatility of annual OPEB expense. This PERiScope alert provides  some perspective.

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GASB 67/68: Calculation specifics on individual entry age normal and recognition of deferred inflows/outflows

September 3rd, 2014 No comments

By Javier Sanabria

New accounting rules for public pension plans in the United States are set to take effect beginning in 2014. This PERiScope article in the Governmental Accounting Standards Board (GASB) Statements No. 67 and 68 miniseries discusses the individual entry age (IEA) actuarial cost method.

The IEA cost method is specifically identified in the new standards as the only appropriate method for determining a plan’s total pension liability (TPL), which is the portion of the present value of benefits attributable to past service. This article will also discuss the calculation of the amortization period to be utilized in recognizing gains or losses that are due to demographic experience or actuarial assumption changes in the annual expense under GASB 68.

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Regulatory roundup

September 2nd, 2014 No comments

By Employee Benefit Research Group

More retirement-related regulatory news for plan sponsors, including links to detailed information.

Treasury and IRS release priority guidance plan 2014-2015
The Department of the Treasury and the IRS recently released their annual Priority Guidance Plan for the July 2014 to July 2015 fiscal year. The plan lists 317 project priorities based on the suggestions of taxpayers, tax practitioners, and industry groups and is revised and republished throughout the fiscal year to reflect additional projects and guidance.

List focuses resources on guidance items that are most important to taxpayers and tax administration. Published guidance plays an important role in increasing voluntary compliance by helping to clarify ambiguous areas of the tax law.

To download the entire 2014-2015 Priority Guidance Plan, click here.

Census Bureau: Survey of public pensions: State-administered DB data
The Census Bureau has published its “2013 Annual survey of public pensions: State-administered defined benefit data.” The survey provides a comprehensive look at the financial activity of the nation’s state-administered defined benefit pension systems, including cash and investment holdings, receipts, payments, pension obligations, and membership information. Statistics are shown at the national level and for individual states. The total cash and investment holdings of the nation’s state-administered defined benefit pensions systems totaled $2.7 trillion in 2013. By comparison, total cash and investment holdings totaled $2.5 trillion in 2012, yielding a 7.8 percent increase from 2012 to 2013.

For more information, click here.

IRS issues draft Form 8955-SSA for 2014
The IRS has released a draft copy of Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits.

To download a copy of the form, click here.

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The evolution of the discount rate for measuring employee benefit obligations under AS15(R)

August 27th, 2014 No comments

By Javier Sanabria

This paper by Milliman consultants Danny Quant and Simon Herborn provides an update for the quarter ended 30 June 2014 on discount rate changes as they apply to liabilities under AS15(R), India’s accounting standard for the cost of providing employee benefits. Implied yields have fallen since 31 March 2014. The impact of this fall will depend on the weighted average expected future working lifetime (WAEFWL) of employees.

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Collaborative technologies require rethinking “dos and don’ts” for effective communication

August 25th, 2014 No comments

By Craig Burma

Burma-CraigAs collaborative communication technologies improve, plan sponsors and Milliman colleagues continue adjusting business etiquette to best use these new instruments. Tools such as Microsoft LYNC, GoToMeeting.com, and Webex.com allow consultants to communicate remotely with plan sponsors to improve service, reduce cycle times, and ultimately reduce costs. However, these productivity gains were far from automatic when these technologies were first implemented.

The humorous YouTube video “A conference call in real life” struck a nerve with many early adopters who have shared similar experiences. The comedy demonstrates the challenges that collaborative communication technologies may present—system audio interruptions, technology incompatibilities, and ambient noise distractions (i.e., the barking dog). It doesn’t help that some of us have attention spans shorter than a child on cotton candy at a three-ring circus. Past the comedic relief, we realized achieving effective use of collaborative communication technologies requires further research.

A process improvement group studied Milliman’s use of collaborative communication technologies. We monitored meetings, collected observable data, and analyzed the results of more than 30 meetings. We were surprised to find the technologies worked fine; the business etiquette established for in-person meetings did not.

From our research, we edited our suggestions into 15 best practices for organizers and 15 best practices for attendees. Here they are:

15 organizer dos and don’ts

1. Don’t plan future sessions outside local business hours of any attendee.
2. Do become highly proficient in the technology before using it in a meeting.
3. Do join at least five minutes in advance to help people checking into the call.
4. Don’t troubleshoot tool issues in session; have a “phone only” option as a backup.
5. Do start on time by utilizing http://www.time.gov with whoever is there.
6. Do state session objective of the meeting within one minute and ask for concurrence.
7. Do take on screen notes; open documents and annotate as needed.
8. Don’t take dictation; ask participants to instant message (IM) or email long content or updates.
9. Don’t assume silence as agreement; affirm key points by voice.
10. Do advise at five minutes remaining to “hard stop” session at time limit.
11. Do ask “any other items for today?” as a trial call close if session objective is achieved.
12. Do close by thanking everyone for their time.
13. Do summarize session outcomes in emailed notes.
14. Do show the date, time, and attendees on all notes.
15. Do email or post notes online within five minutes of session close.

15 attendees dos and don’ts (all apply to organizer as well)

1. Do read session objective four hours in advance; your mind will prepare itself.
2. Do have your computer and phone charged and in a quiet area.
3. Don’t use a speaker phone next to the keyboard you are typing on.
4. Do mention any nonobjective items at beginning—ask organizer to note.
5. Don’t be within earshot of a (possibly) barking dog or other audio intrusions.
6. Do actively use the mute button if no quiet place is available.
7. Do know when mute is on or off at all times.
8. Don’t listen for name to be called and then pay attention; it’s too late at that point.
9. Don’t put call on hold; everyone has on-hold music and we hear it.
10. Do say your first name and company in one-time sessions of multiple companies.
11. Don’t say your name each time you speak; we probably know your voice.
12. Don’t leave session before close; count on important items at end.
13. Do offer to take items off-line if a discussion is between two attendees only.
14. Do message or mention if you have to leave a call early.
15. Do continually assess session effectiveness and send feedback to organizer.

Milliman employee benefits consultants will continue to use collaborative communication technologies within their organizations and with plan sponsors. But like the telephone, the fax machine, and email in their time, we will continue to update our “dos and don’ts” to make these interactions as seamless as if they were held in person. Adhering to these dos and don’ts will ensure time well spent for both organizers and attendees.

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