More retirement-related regulatory news for plan sponsors, including links to detailed information.
IRS issues memo on the application of section 409A to back-to-back arrangement
The Internal Revenue Services’ Office of Chief Counsel issues a memorandum (No. 201725027) on the application of section 409A to back-to-back arrangement. According to the memo, “Treas. Reg. Section 1.409A-3(i)(6) provides that the amount of the payment under the ultimate service recipient plan may not exceed the amount of the payment under the intermediate service recipient plan. Therefore, the USR Plan fails to meet the requirements of section 409A because the USR Plan provision providing for a payment to Taxpayer in the event of a Participant’s separation from service before vesting is an impermissible payment event.”
For more information, read the entire memo here.
Higher paid workers more likely to have access to retirement benefits
According to data published by the Bureau of Labor Statistics (BLS), “Sixty-six percent of private industry workers had access to employer-provided retirement plans in March 2016. Having access means employers offered the benefit, regardless of whether employees chose to participate. Forty-nine percent of private industry workers participated in retirement plans in March 2016. That results in a take-up rate—the percentage of workers with access to a plan who participate in the plan—of 75 percent. Access, participation, and take-up rates were all higher for workers in higher wage groups than for workers in lower wage groups.”
To learn more about the BLS’ data, click here.
Stocks are seemingly indefatigable, marking their seventh consecutive month of positive returns. In this month’s commentary we address:
• Equity market volatility exhibits an inverse relationship with stock/bond correlation. This is a benefit to managed risk funds.
• As a result of ongoing low volatility, managed risk funds have generally implemented their respective maximum equity allocations for most of 2017.
• Market-based measures of financial risks are near pre-crisis lows. How does a managed risk approach fit in that context?
To learn more, read Joe Becker‘s full commentary at MRIC.com.
More retirement-related regulatory news for plan sponsors, including links to detailed information.
PBGC releases final rule on examination and copying of records
The Pension Benefit Guaranty Corporation (PBGC) is amending its regulation on Examination and Copying of PBGC Records to incorporate statutory changes to the Freedom of Information Act (FOIA).
The majority of the regulatory changes are specifically required by the FOIA Improvement Act of 2016. Section 3 of the 2016 Act requires federal agencies to review their FOIA regulations and to make conforming amendments, as necessary, to incorporate the 2016 Act’s changes to the FOIA. In addition to the changes required under the 2016 Act, PBGC is making one other amendment to its FOIA regulation that incorporates a previous statutory change under the Open Government Act of 2007.
As amended, the FOIA requires each agency to affirmatively release certain records that the agency determines are likely to be the subject of future requests, as well as certain others that have been the subject of three or more requests. The FOIA also requires agencies to redact such records to the extent necessary to protect personal privacy interests before adding them to the electronic reading room.
PBGC is amending its FOIA regulation by increasing the appeal deadline from 30 to 90 days, in conformity with the 90-day minimum time period established by the 2016 Act.
To read the entire final rule, click here.
Unanticipated inflation can adversely affect capital gains and fixed incomes. It is important for banks and other financial institutions to evaluate the prospect for future changes in price levels. In the United States, low inflation levels have created uncertainty surrounding the top-down policy measures that directly affect prices.
This Milliman Insight paper by Patrick Humes examines recent monetary policies that were employed to create inflation. It offers perspective on why these measures were not effective. Additionally, the paper outlines the proposed fiscal policies of the new administration and its prospect for increasing prices.
Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In May, the deficit for these plans rose by $22 billion from $257 billion to $279 billion, due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. As of May 31 the funded ratio had fallen to 83.8%, the 1.10% decline partially offset by investment returns.
Corporate pensions have experienced a 23 basis point drop in discount rates since the start of the year, depleting funded status gains accumulated during the first quarter. While liabilities continue to pile up as discounts rates decline, investment returns have been above expectations for first five months of 2017, preventing further deterioration to pension funded status.
Looking forward, under an optimistic forecast with rising interest rates (reaching 4.11% by the end of 2017 and 4.71% by the end of 2018) and asset gains (11.0% annual returns), the funded ratio would climb to 91% by the end of 2017 and 104% by the end of 2018. Under a pessimistic forecast (3.41% discount rate at the end of 2017 and 2.81% by the end of 2018 and 3.0% annual returns), the funded ratio would decline to 80% by the end of 2017 and 73% by the end of 2018.
To view the complete Pension Funding Index, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.
This blog is the fourth in a series of six that will highlight considerations for and the impact of employee benefit plans on mergers and acquisitions (M&A) transactions. Click here for additional blogs in this series. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.
M&A transactions occur regularly and come in a multitude of structures and players. Sometimes they’re simple two-dimensional deals—one buyer, one seller—sometimes they’re multidimensional—multiple buyers and sellers, plus unions, government entities, federal agencies, etc.
Urgency usually is the call of the day. Properly and quickly assessing the deal landscape under a current lens, as well as a forward-looking post-deal lens, can be crucial for the deal to be successful for all involved.
The incidence of defined benefit (DB) pension plans requires separate expertise to be included on the due diligence and post-merger teams. The amount of work involved in this area can usually be quickly assessed by an experienced actuary. It may have little impact on the structure of the deal or it may drive large elements of the deal, significantly impacting the purchase price or killing the deal entirely.
Below are a few elements to consider from the buyer’s perspective and some examples of the impact they can have on the deal:
||Can vary significantly depending on different viewpoints and market fluctuations.
||Can impact annual costs, balance sheet entries, and funded status significantly.
|Plan Demographics and Demographic Assumptions
||Can vary significantly from expectation.
For example, a business might have a pension plan with 10 times the number of plan participants as employees.
Review demographics assumptions used in the valuation compared with experience and critical plan provisions.
|This can impact go-forward policies and plan operating requirements.
Key benefit provisions could be undervalued or not valued at all with significant liability underreporting.
||Have varying practices.
For example, some audit teams allow companies to net supplemental employee retirement plan (SERP) liabilities against rabbi trust assets.
|Accounting allowances vary significantly between auditors: acceptable to theirs may not be acceptable to yours.
||Only show net amounts.
||Can mask underlying plan size and corporate impact. Even the slightest movement in plan assets or liabilities can dramatically change balance sheet entries.
||Can be surprisingly high.
||Management employment contracts.
||Usually trigger additional liabilities with change-in-control.
||Buyer should be aware that ERISA or GAAP funded status may not be a good measure of the cost to terminate the plan.
|Unpredictable contingent event benefits (UCEBs) that are due to plant shutdown or layoff.
||Buyer should be aware of these provisions and potential impact to cash funding and expense.
||Plans with a low enough funded status will require additional cash contributions, special Pension Benefit Guaranty Corporation (PBGC) valuations and reporting, a potential freeze on benefit accruals, and restrictions on some optional forms of payment.
||Onboarding underfunded plan.
||Can affect entire controlled group executive nonqualified deferred compensation (NQDC) plans and loan covenants.
||Merging an underfunded plan.
||Can trip funding thresholds in combined plan with amplified effects.
||Synergy-driven plant closings.
||Can trigger unsought involvement of federal pension oversight agencies and massive accelerations in cash contribution requirements.
||Uncertified plan benefits.
|Require additional work and perhaps additional liabilities.
||Seller may be obligated for continued, post-close contributions.
||Who is responsible, especially if agency agreements are in place?
|Carryover and prefunding balances (credit balances).
||Large credit balances may mask upcoming cash contribution requirements.
||Contribution due dates.
|Can cause surprises. Who pays, who deducts?
||Plans may have existing agreements with the PBGC.
||May require additional contributions.
||Project plan costs.
||Significant changes in cost might emerge in near-future years, impacting economics of deal.
|Bring significant resource diversions and legal liability.
||Current audits or investigations by the Internal Revenue Service (IRS), PBGC, or U.S. Department of Labor (DOL).
||May impact legal and financial obligations as well as reputational risks.
||Material claims pending or threatened related to the plans.
||Negotiated benefit increases or cost-of-living adjustments (COLAs) in collective bargaining agreements (CBAs) might not be fully reflected in valuations.
||Liabilities that are due to current contractual agreements may not be reflected in liability disclosures.
Additional retirement plan considerations include:
• Inventory discovery may lead to undisclosed plans and liabilities
• Carve-outs can spin plans many different ways, affecting future plan/corporate economics
• State of target’s plan administration could bring burdens
• Proper administration support for the pension plans
• In-house pension expertise evaporating on both sides
• Poison pills need valuation and assessment
• Foreign plan issues such as termination indemnities (if any)
• With the elimination of the Internal Revenue Service (IRS) approval process for individually designed qualified retirement plans, it will be important that plan changes going forward do not jeopardize the qualified tax status of the plans, upon random audits from the IRS.
Pension plans can add complexity to a merger or acquisition. It is important to involve an actuary in the process to identify and help mitigate risks.