Is 2015 the year of lump-sum sweeps?

February 27th, 2015 No comments

By Stephanie Sent

Sent-StephanieAt the beginning of each year, plan sponsors often ask if we see any retirement trends for the year ahead. One issue emerging in 2015 may be an increase in the number of lump-sum sweeps for defined benefit retirement plans. A lump-sum sweep is when a plan sponsor offers a lump sum temporarily to a group of terminated participants and settles all or a portion of the plan sponsor’s pension obligations. There are many reasons why a plan sponsor may (or may not) choose to perform a lump-sum sweep:

• The size of the plan has grown to a disproportionate size in comparison with the current size of the company. Lump-sum sweeps may be one tool to adjust that balance.
• Escalating Pension Benefit Guaranty Corporation (PBGC) premiums, especially for vested terminated participants with small benefits. The flat rate PBGC premium for 2015 is $57 per participant. Remember when they used to be $19 per participant? Lump-sum sweeps may be one solution to reduce those premiums.
• The plan sponsor is seeking to terminate the retirement plan or is on a de-risking glide path. Lump-sum sweeps may be one way to further the long-term objectives.

Of course, there are a number of factors why a plan sponsor may choose to not execute a lump-sum sweep as well, including:

• The missed opportunity cost for higher return on plan assets, since lump-sum sweeps reduce the plan assets as well as the plan liabilities.
• Depending on the interest rates used to value the lump sums versus the interest rates used for minimum funding requirements, the funded status of the plan may drop if more assets are paid out than liabilities are released.
• With interest rates at a historic low, lump sums are higher than they might be in the future if interest rates increase.
• The Government Accountability Office (GAO) has voiced concerns that plan participants have not received adequate information regarding lump sum distributions versus life-time annuities to make informed decisions.

Why 2015? The Internal Revenue Service (IRS) has published lump-sum mortality tables through 2015. Many expect changes for 2016 or 2017 mortality rates, so that they better reflect the fact that people are living longer. As a result, the lump-sum values of retirement benefits going forward could increase significantly, somewhere in the range of 5% to 10%. If this is the case, the timing of these forthcoming changes is important, because they could be published by the IRS as soon as the third or fourth quarter of 2015. Plan sponsors already contemplating a lump-sum sweep may want to do so in 2015 in order to avoid this increase. Of course, 2015 has just begun, so stay tuned.

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Milliman infographic: Variable annuity pension plan

February 25th, 2015 No comments

By Javier Sanabria

The variable annuity pension plan (VAPPs) design combines features from traditional defined benefit plans along with features from defined contribution plans. This infographic illustrates specific retirement plan sponsor needs that VAPPs help address.

Our “Variable annuity pension plan reading list” also provides more perspective from Milliman consultants.

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Regulatory roundup

February 23rd, 2015 No comments

By Employee Benefit Research Group

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

PBGC seeks comments on Multiemployer Pension Reform Act (MEPRA) of 2014
The Pension Benefit Guaranty Corporation (PBGC) filed a request for information (RIF) to inform future PBGC guidance under section 4231 and 4233 of ERISA. PBGC is seeking comments from all interested stakeholders, including multiemployer plan participants and beneficiaries, organizations serving or representing such individuals, multiemployer plan sponsors and professional advisors, contributing employers, unions and other interested parties.

To read the entire RIF, click here.

PBGC posts FAQs on MEPRA
The PBGC has published a set of frequently asked questions (FAQs) regarding the MEPRA. The FAQ consists of 10 questions and answers. The PBGC will continue to update this FAQ web page to reflect changes.

To view the FAQs, click here.

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GASB 67/68: Special Funding Situations

February 19th, 2015 No comments

By Javier Sanabria

In 2014, new accounting rules for U.S. public pension plans took effect. To implement those rules successfully, a variety of technical concepts regarding newly required calculations need to be understood. The Government Accounting Standards Board (GASB) Statements No. 67 and 68 miniseries discusses special funding situations. With special funding situations, major accounting metrics under GASB must be adjusted to reflect the relationship. Milliman’s Jennifer Sorensen Senta provides perspective in this PERiScope article.

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Tools for multiemployer pension plans in critical and declining status

February 17th, 2015 No comments

By Employee Benefit Research Group

The Multiemployer Pension Reform Act of 2014 (MEPRA) was part of the Consolidated and Further Continuing Appropriations Act of 2015, which was signed by President Obama in December. One of the major changes MEPRA has made is the creation of a new status for very poorly funded plans called “critical and declining status.” In this Multiemployer Review, Milliman consultants Robert Behar, Nina Lantz, and Victor Harte define this new status and outline major rules and procedures related to plan mergers, plan partitions, and benefit suspensions.

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Regulatory roundup

February 17th, 2015 No comments

By Employee Benefit Research Group

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

IRS schedules phone forums on retirement plan loans and second Cycle E determination letter application process

The Internal Revenue Service (IRS) has announced it will be holding two phone forums:

1. Retirement plan loans to participants (March 26, 2015)
• What type of plans can make loans to participants;
• What are the conditions a plan must follow to make loans;
• What are the required terms of a plan loan;
• How may plan loans be taxable under IRC Section 72(p);
• When do plan loans violate the prohibited transaction rules of IRC Section 4975;
• How to fix plan errors involving loans.

To register, click here.

2. Highlights of the second Cycle E determination letter application process (March 5, 2015)
• Who may submit during the second Cycle E;
• What you must include with your application;
• How we will process your application;
• What are the new reference lists;
• What changes you must make to your plan (Notice 2014-77 – 2014 cumulative list).

To register, click here.

Request for comments on MEPRA’s benefit suspension provisions
The Department of the Treasury invites public comments with regard to future guidance required to implement provisions of the Multiemployer Pension Reform Act of 2014, Division O of the Consolidated and Further Continuing Appropriations Act, 2015, Public Law No. 113-235 (MPRA). MPRA generally permits a sponsor of a multiemployer defined benefit plan that is in critical and declining status to suspend certain benefits following the provision of specified notice, consideration of public comments, approval of an application for suspension, and satisfaction of other specified conditions (including a participant vote).

The request for comments is scheduled to be published in the Feb. 18 Federal Register. Comments are due 45 days after publication.

To read the request, click here.

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Retirement plans: Key dates and deadlines for 2015

February 13th, 2015 No comments

By Employee Benefit Research Group

Milliman has published 2015 retirement plan calendars for single-employer defined benefit (DB) plans, multiemployer defined benefit plans, and defined contribution (DC) plans. Each calendar provides key administrative dates and deadlines.

2015 single-employer defined benefit plans calendar
2015 multiemployer defined benefit plans calendar
2015 defined contribution plans calendar

Along with downloading each calendar, be sure to follow us at Twitter.com/millimaneb where we tweet upcoming dates and deadlines for plan sponsors.

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VAPPs: Coming soon to a retirement plan near you?

February 12th, 2015 No comments

By Grant Camp

Camp,-GrantAs previously written about on this blog in April 2014 and May 2013, variable annuity pension plans (VAPPs) are regaining interest for retirement plan sponsors because their structure combines many of the strengths of traditional defined benefit plans with the strengths of traditional defined contribution plans.

Defined benefit plan features of VAPPs
As with traditional defined benefit plans, benefits in a VAPP are paid for the lifetime of the participant and beneficiary. While the level of the benefit may not be guaranteed, stabilization strategies exist to dramatically reduce the possibility of retiree benefit declines and the participant does not need to worry about running out of money during retirement. VAPPs pool longevity risk within the plan and have professional asset management like a traditional defined benefit plan, enabling the plan to provide larger average benefits per dollar contributed compared to individually directed defined contribution accounts. These defined benefit plan characteristics are desirable for employers looking to attract and retain top talent.

Defined contribution plan features of VAPPs
As with defined contribution plans, VAPPs have controllable employer costs and no funding surprises. VAPPs maintain their funded status in all market conditions, which eliminates concerns about underfunding. This means that plan sponsors can set a target contribution level such as a fixed dollar amount or fixed percentage of pay, similar to a defined contribution plan. Additionally, participants participate in market upside, providing a portable benefit (meaning that a participant is not harmed by switching jobs mid-career) and expected inflation protection during retirement.

To learn more about VAPPs, visit this reading list.

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Milliman Hangout: Pension Funding Index, February 2015

February 11th, 2015 No comments

By Javier Sanabria

The funded status of the 100 largest corporate defined benefit pension plans dropped by $90 billion during January as measured by the Milliman 100 Pension Funding Index (PFI). The $90 billion funded status decline was the eighth largest monthly drop in the 15-year history of the Milliman 100 PFI. The funded status deficit ballooned from $292 billion to $382 billion since December 2014 due to the 42 basis point decline in the benchmark corporate bond interest rates used to value pension liabilities. Pension assets had a monthly above-expected return due to strong fixed income asset return and this helped to counter liability losses. The funded ratio decreased from 83.5% to 79.6%.

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

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Variable annuity pension plan reading list

February 9th, 2015 No comments

By Javier Sanabria

Variable annuity pension plans (VAPPs) are hybrid retirement plans that provide employers an alternative design to the traditional defined benefit (DB) plan and the defined contribution (DC) plan. VAPPs can stabilize contributions for sponsors while offering participants lifelong income. This reading list highlights various aspects related to VAPPs.

• Milliman Hangout: Variable annuity pension plans (VAPPs)
Milliman consultants Kelly Coffing and Grant Camp talk about the VAPP’s features in this video. They also discuss the value VAPPs offer sponsors and participants.

“Making the case for variable annuity pension plans (VAPPs)”
VAPP retirement benefits increase or decrease depending on whether a plan’s investments return more or less than the established “hurdle rate.” A benefit stabilization strategy preserves funding stability and diminishes benefit declines. Coffing and Camp discuss the strategy in this article.

“Making the case for variable annuity pension plans (VAPPs): Basic VAPP benefits and design strengths”
This article provides examples of how a retiree’s basic VAPP benefits would change over different historical periods. The article also details the strengths and weaknesses of the VAPP design.

“Making the case for variable annuity pension plans (VAPPs): Stabilized VAPP benefits”
In this article, Coffing, Camp, and Ladd Preppernau discuss the stabilized VAPP model. The design involves building a reserve, spending the reserve in down markets to prevent benefit decreases, and improving benefits if the reserve is larger than is required to prevent benefit decreases.

Making the case for variable annuity pension plans (VAPPs): Shared retirement risks: How VAPPs stack up
There are four main risks associated with retirement plans: Investment risk, interest rate risk, inflation risk, and longevity risk. This article authored by Coffing, Camp, and Preppernau provides perspective on how VAPPs address these risks.

“A balanced approach to retirement risk”
VAPPs address several sponsor concerns like funding and accounting volatility. The design also helps alleviate participant concerns related to money management and inflation. Milliman’s Camp offers more perspective in this blog.

“Variable annuity plans may benefit employers and employees”
In this blog, Milliman’s Ryan Hart provides a chart comparing and contrasting VAPPs alongside defined contribution plans and traditional defined benefit plans.

“Variable annuity pension plans: An emerging retirement plan design”’
In this article, Coffing and Mark Olleman provide historical scenarios of how retirees’ benefits would vary over time under a VAPP structure.

“Variable Annuities: A retirement plan design with less contribution volatility”
Multiemployer plan trustees seeking sustainable ways to provide participants with lifelong benefits that allow for more predictable contributions may want to consider the VAPP design. This paper by Olleman, Coffing, and Preppernau explains the advantages that VAPPs offer single and multiemployers as well as their employees.

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