Category Archives: Pensions

Communicating a defined benefit plan conversion

Milliman consultants assisted one particular multiemployer defined benefit plan’s transition to a stabilized Milliman Sustainable Income Plan™ (SIP), formerly known as the variable annuity pension plan (VAPP). The conversion required a communication strategy conveying the new plan’s design to participants. In this article, Jessica Gonchar describes how the firm implemented an employee communications campaign explaining the basic principles of a SIP and how it differs from the prior plan.

Milliman Hangout: Milliman Actuarial Retirement Calculator™ (MARC™)

The Milliman Actuarial Retirement Calculator (MARC) is a pension administration and communication tool for pension plan sponsors. The system offers data storage, benefit calculation, correspondence management, a participant website, and more.

In this video, Milliman’s Kevin Hicks explains some of MARC’s benefits. He also showcases MARC’s participant website.

To learn more about MARC, click here.

Central States ruling highlights the importance of communication

tenBroek_HeidiOn May 6, the U.S. Department of the Treasury denied the Central States, Southeast and Southwest Areas Pension Plan’s (Central States) application for benefit suspensions. According to Treasury, the plan’s proposal was fundamentally flawed in three ways. The first two reasons Treasury gave were that the proposed benefit suspensions were “not reasonably estimated to allow the plan to avoid insolvency” and were “not equitably distributed” (the plan did not explain to Treasury’s satisfaction the variations in the treatment of different classes of participants).

Poor communication is the third way the plan’s proposal failed to satisfy the requirements. According to Treasury, the plan’s notices to participants were “not written in a manner so as to be understood by the average plan participant.” Treasury explains:

• “The notices extensively use technical language without adequate explanation
• Critical terms used in the notices are not defined in the notices but only by cross-reference to other documents (e.g., the plan document and the rehabilitation plan document); and
• The cross-referenced definitions in those other documents are not understandable to the average plan participant.”

Few pension plans are getting the kind of attention that’s being paid to Central States. But many plans looking to the possibility of benefit suspensions in the future can take this opportunity to learn from Treasury’s issues with Central States’ application. Remember that good participant communications need to be included in your calculations.

For more perspective, read Tim Connor’s article “Central States Pension Plan and the Multiemployer Pension Reform Act.”

The Multiemployer Pension Reform Act and the Central States Pension Plan controversy: What is at stake?

Connor_TimThe Multiemployer Pension Reform Act of 2014 (MPRA) allows certain multiemployer plans that are projected to become insolvent to reduce benefits indefinitely. Ordinarily, when a multiemployer plan goes insolvent, it receives annual financial assistance from the Pension Benefit Guaranty Corporation (PBGC) to support payment of retiree benefits at maximum guaranteed levels. However, the PBGC program itself is in dire straits, recently projecting its own multiemployer program insolvency by 2025. At that point, the PBGC is essentially predicting it will not have enough money to provide the support needed to maintain retiree benefit levels. This means that retiree benefits in an insolvent plan could potentially be reduced below the PBGC-guaranteed levels because there wouldn’t be enough combined money available from the plan and the PBGC to support those levels.

The Central States, Southeast and Southwest Areas Pension Plan (Central States) reported that its own projected insolvency will occur in 2026 in its application to the U.S. Treasury Department in 2015 to implement MPRA suspensions. The plan has close to 400,000 total participants, roughly half of whom are retired. The MPRA cuts, some of which are as high as 70%, are actually designed to produce higher benefit amounts than would be paid if the plan actually went insolvent, although MPRA cuts would be effective July 1, 2016, instead of upon actual insolvency.

The Treasury is scheduled to approve or deny the Central States application by May 7, 2016. During the review, the Treasury has heard from participants and advocate groups that cuts were not designed in an equitable manner; steps were not properly taken by the plan to avoid the current situation; future projections are not based on reasonable assumptions; and, in general, the law is unjust and unfair to the participants involved. Ultimately, it would take Congressional action to address that last concern. In the present, the Treasury will have to review and decide if Central States followed the terms of MPRA in designing its solution to avoid insolvency. If the Treasury approves the application, it will go to a vote. However, even if the participants vote no, it may not matter because the Treasury is likely obligated by MPRA to override the vote and implement some form of suspensions anyway because Central States is likely deemed to be a “systemically important plan,” one which requires $1 billion or more of PBGC assistance.

For now, all eyes are on May 7, waiting to see how the Treasury proceeds. Multiemployer plan sponsors and participants will no doubt pay close attention and stay tuned to any whispers of potential success in attempts by various parties in repealing or changing MPRA in any material way, despite those attempts looking unlikely today. In the meantime, the task for other sponsors in keeping their plans healthy and adequately funded is more essential than ever, and needs to be continually executed with careful attention.

For more perspective, read Tim’s article “Central States Pension Plan and the Multiemployer Pension Reform Act.”

Pension eligibility in Canada

Longer life expectancy can put a financial strain on pension plans because more money is needed to pay beneficiaries for an extended period of time. One solution enacted by the Canadian government in 2012 was to gradually increase the eligibility age for its Old Age Security Pension program from 65 to 67. However, Canada is returning the eligibility age to 65 this year.

In this Globe and Mail article, Eckler actuary and managing principal Jill Wagman discusses the effects that increased life expectancy has on pensions, providing reasons for the age requirement to remain at 67.

Here is an excerpt:

In 1967, the eligibility age was changed to 65, and the expected payout period was 15 years. Today, the average life expectancy for a 65-year-old Canadian is more than 20 years – a third longer than the payout period anticipated in 1967. If the eligibility age isn’t changed, the payout period will continue to grow as life expectancy increases….

According to the latest OECD Pensions Outlook Report, postponing retirement as life expectancy increases is the best approach to address the challenges faced by publicly funded pay-as-you-go pension schemes. The United States, Britain, Germany, France, Spain, Italy and the Netherlands all have plans in place to increase the general retirement age to 67 from 65 by 2028 or sooner. Canada should be taking similar measures.

Retirement plans: Key dates and deadlines for 2016

Milliman has published 2016 retirement plan calendars for single-employer defined benefit (DB) plans, multiemployer DB plans, and defined contribution (DC) plans. Each calendar provides key administrative dates and deadlines.

2016 single-employer DB calendar
2016 multiemployer DB calendar
2016 DC 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.

Summary plan descriptions: Your secret weapon for achieving plan administration clarity

Gonchar-JessicaMilliman consultant Dominick Pizzano recently wrote an article for Benefits Perspectives about the importance of unifying defined benefit documents and administration practices. In the article, he advised employers about various ways they can keep their plan documents up to date with both administration and Internal Revenue Service (IRS) rules. Reading Pizzano’s article, we began to think about how often we work with summary plan descriptions (SPDs). Although Pizzano didn’t focus on it, there’s an additional tactic that might be helpful in marrying up the plan document and administration: updating the SPD.

SPDs describe the provisions of the plan document in language that can be understood by average participants and their beneficiaries. Updating the SPD with a focus on helping those enrolled understand how the plan works can often uncover differences among the plan document, the employer’s understanding of the plan, and how the plan is administered. Our clients have had such differences come to light a number of times as the result of revising SPD language, and the discrepancies were then able to be clarified. Revising or updating the SPD can be another strategy to add to Pizzano’s expansive list.

Keep your employees warm during a pension plan freeze or termination

Bentz-JulieYour pension plan is frozen. Your pension plan is terminating. While the temperature for pension plans continues to drop, don’t leave your participants out in the cold.

In today’s business environment, employers continue to shift more and more of the responsibility for their benefits to employees. A few examples come to mind, including high-deductible health plans with health savings accounts (HSAs), wellness programs, and telemedicine. How employees save for retirement is certainly near or at the top of that list. Your decision to freeze or terminate your pension plan may not come as a big surprise to your participants. But that doesn’t mean that they will understand what this decision really means for them or what they need to do to stay on track for a secure retirement.

A pension freeze or termination can lead to a lot of logistical and regulatory hurdles for both company management and the plan administrator—for example, in the case of a termination, improving the funded status of the plan, submitting government filings, and finding lost participants. The up-front data cleanup project for a termination alone may leave a chilly feeling in the air. Aside from what’s required, consider how you can help your participants make this important transition.

1. Start early. As with most change management communication, begin communicating with your employees as soon as possible. You don’t want them to find out what you’re planning through watercooler gossip or the local newspaper.
2. Be direct. Help your participants understand the business reasons for the change. Remember that your active employees aren’t the only ones who may need to warm up to the idea. Former employees with a vested benefit in the plan and former employees who are retired and already receiving a monthly check also need to be in the loop on what’s happening.
3. Promote the good news. Let your employees know if there’s still “free” money to be had. Now is a good time to remind employees about any matching or profit-sharing contributions that you make to your defined contribution (DC) plan. A pension plan was always intended to be only a piece of the retirement savings puzzle. With the pension plan going away, the rest of the retirement pieces take on greater importance.

With the shift in focus from a pension plan to a DC plan, you can also make employees aware that they’re now in control of their retirements. They control how much they contribute; they control where the funds get invested. Employees will now be the arbiter of their own retirement destinies. Through research and use of the saving and investing tools that your plan offers, they can continue to be or become informed consumers.

Overall, this process might be complicated for you as a plan sponsor. However, employees may also feel confused and uncomfortable—even frozen just like the plan. Through effective communication, you can help them decide whether to save more in their DC plans, and in the case of terminations, whether to take a one-time lump-sum distribution or stick with the annuity. Guide them to a resource where they can receive sound financial advice. And help them to understand their options so they can avoid the potential taxation pitfalls related to these types of decisions.

Keep your employees informed before, during, and after the process. This open line of communication will help you maintain positive employee relations long after the project is done. After all, just because your plan is undergoing a freeze or termination doesn’t mean you can’t help everyone feel warm and fuzzy about their benefits.

Planning key to avoiding pension termination data pitfalls

Pushaw-Bart“Data! Data! Data!” Sherlock Holmes cries impatiently in a story by Sir Arthur Conan Doyle. “I can’t make bricks without clay!” Nothing could be truer, especially when it comes to a pension plan termination. However, this might easily be forgotten in the preparation process.

Plan sponsors can get bogged down with all the actuarial numbers, all the cash and accounting charges, all the corporate approvals, all the regulations. It’s a lot. Yet a pension plan and its termination remain at the mercy of the data. And there is a lot of data because there are a lot of participants. And properly dealing with it is a lot of detailed work.

First, plan sponsors will need to calculate final benefit amounts. Second, they will need to get this information into the hands of the participants—each and every one of them. Third, they’ll need participants to return completed election forms. And fourth, they’ll need to deliver the benefits to participants in either a lump sum (rollover) or annuity certificate. This may sound easy, but don’t count on it. These steps will not be successful without good data. When determining if your data is up to snuff, consider these factors.

Participants
At first blush, management might simply think of plan participants as current employees. However, former employees who retain a vested benefit in the plan and former employees who are retired and receiving monthly pension checks, are also plan participants. While active employee and retiree data is most likely current and accurate, the same may not be true for former employees.

Benefit calculations
To calculate benefits, plan sponsors need final, complete, and accurate data. We’re talking data going back maybe 30 to 40 years; that’s before desktop computers, back when file cabinets were filled with index cards containing employment history. Consider these questions:

• How complete and accurate are your files?
• Do you have historical information on groups that came in via corporate acquisitions?
• Do you have applicable prior plan documents?
• Is the data in an electronic format?
• Can you verify benefit distributions that might have been made many years ago?
• Can you verify the details of benefit calculations that were prepared many years ago for former employees or for when benefit accruals were frozen for current employees?

Addresses
Finally, take a look at the location of your people. Where are they—and can you find them? Think about things like name changes, cross-country relocations, divorces, deaths. Ask yourself:

• Do you have current mailing addresses? How do you know?
• How many missing people can you locate? How do you do that?
• If a former employee died, do you know if there is a surviving spouse who is due a benefit?

Once the decision is agreed upon, the work falls on plan committees and assigned staff. One large job, the single largest probably, is dealing with the plan participant data. So it’s important to understand and assess data issues early with assistance from your actuary or pension plan administrator.

The big bang theory and pension plan terminations

Pushaw-BartNuclear fission1 and pension plan termination. You’d be surprised at how much they have in common. In other words, left alone, fissionable material decays on its own, eventually distributing its last. On the other hand, with a little help, it can go away in one very big bang. It’s the same result in the end. Pension plans behave the same way. Left alone, they pay out monthly benefits along with lump sums, eventually distributing their final payments. The big bang version for a pension plan is a total termination. In either case, the result in the end is the same.

For a pension plan, these are the two extremes. Between these extremes is a continuum along the termination spectrum, which is controlled by the plan sponsor. We can accelerate the plan’s normal, slow rate of decay up to and including a big bang, total termination. This slower decay we ought to refer to as a termination, too, just not the big one, total termination. Today, such fractional terminations are popularly referred to as de-risking. Nothing new, mind you, just an updated moniker. Of course, with enough fractional terminations, we end up with a total termination just the same.

One type of fractional termination is a lump-sum window or cash-out initiative. Lump-sum windows usually refer to a plan which is offering lump-sum distributions to a vested group of former employees who otherwise would not have access to their benefits until retirement. The window of opportunity usually exists for a few months, then closes. Cash-out initiatives are slightly different in that the former employees already have access to a lump sum distribution but now are getting a friendly reminder. After declining the original offer, their lump sum may have grown and is perhaps now a bit more desirable. Both types of project can be regulated toward a manageable administrative size or with an eye toward avoiding unwanted accounting repercussions. Target groups are made up of those former employees who retain a vested benefit under the plan. Retirees in pay status are off limits. These groups may require administrative sleuthing if mailing address information is out of date.

Another type of fractional termination is off-loading plan obligations to an insurance company through the purchase of an annuity. This is the principal means of removing retirees from the plan. Carriers may want the business enough to drive the purchase price of the annuity down sufficiently to make the opportunity very attractive to a sponsor. These annuity placements may also be sized to fit the sponsor’s financial needs.

This leaves us with those plan participants who are still employed by the sponsor, which brings us back to the big bang total termination. We need to be a little clearer about this. A total termination is a big bang because you can distribute lump sums and place annuities for everyone left in the plan all at once. It also requires a high level of rigor as it falls under focused scrutiny by the U.S. Department of Labor, the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC). A big bang total termination is just a whole bunch of fractional terminations bundled up to occur all at once under a formal regulatory framework.

Nuclear fission can happen bit by bit over time or can be speeded up with sudden and dramatic results. Working a series of fractional terminations, perhaps leading up to a total termination, allows greater flexibility of timing and financial control for a plan sponsor.

1If your physics is a little rusty, nuclear fission is “the splitting of an atomic nucleus into approximately equal parts, either spontaneously or as a result of the impact of a particle usually with an associated release of energy. Collins English Dictionary, 12th ed. (2014). “Nuclear fission.” Retrieved January 18, 2016, from http://www.thefreedictionary.com/nuclear+fission.