Category Archives: Pensions

Pension data cleanup can reduce costs

Data cleanup can help defined benefit (DB) plan sponsors avoid incorrect participant payments and the cost associated with correcting mistakes. Milliman’s Audrey Palmer discusses the potential mishaps that may result from inadequate pension data and the benefits of data cleanup in the DB digest article “Why good data matters.”

Here is an excerpt:

Each year, your plan’s compliance with Internal Revenue Service and Department of Labor regulations also depends on the integrity of the plan’s data. Incomplete or incorrect data can potentially cause noncompliance with many plan-disqualifying regulations, including disclosure requirements, minimum funding requirements, and minimum coverage, participation, and vesting requirements. It can also cause a serious financial burden to participants when excise taxes are imposed that are due to late payment of required minimum distributions. …

… A data cleanup project can make a significant impact to the ongoing administration of your plan by enhancing the individual participant experience, helping to ensure compliance with regulatory requirements, and keeping the plan agile and able to respond to an ever-changing financial and regulatory landscape.

The up-front cost of a data cleanup project is justified when care has been taken to identify the gaps that are easiest to close and will make the most impact. Milliman consultants have experience with this prudent analysis and can help determine which cleanup projects will produce the best return on investment.

An essential part of any data cleanup project is an evaluation of the ongoing periodic data files that provide the participants’ statuses, compensation, hours, and any indicative data to the recordkeeper. Each payroll should undergo a validation check to make certain the expected population, expected totals, and expected statuses are loaded with each file. These checks, combined with a comprehensive analysis of the file produced by the plan sponsor, will catch most errors that could cause ongoing data issues.

A sustainable retirement plan for sponsors and participants

The Milliman Sustainable Income PlanTM (SIP) is a good retirement plan option for employers seeking predictable contributions while offering employees lifelong income. According to Milliman consultant Kelly Coffing, the SIP offers sponsors and participants the following:

• Professional asset management throughout participants’ working and retired years
• Maximized retirement benefits per dollar of employer contribution
• Lifelong inflation-protected income
• Stable, predictable contributions for sponsors

For more perspective, read Kelly’s article in Money Management Intelligence entitled “Retirement plan innovation that opens up investment possibilities.”

The Stabilized Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM(SIP).

PBGC proposes late payment penalty relief

Hagin NeilThe Pension Benefit Guaranty Corporation (PBGC) insures the pension benefits accrued by participants covered under private-sector defined benefit pension plans in the event the employer sponsoring the plan becomes insolvent. If a plan sponsor is unable to meet its benefit obligation to participants, the PBGC will pay the pension benefit, but only up to certain limits established under Department of Labor regulations.

PBGC collects premiums from the employers, i.e., plan sponsors, in order to provide this federally mandated insurance. The premium for single-employer plans has two components: a flat dollar (flat rate) premium, which is simply a flat dollar charge for each participant covered under the plan, and a variable rate premium, which is a percentage of the deficit between the pension assets and the actuarially determined pension obligation (also referred to as the “unfunded vested benefits”).

Recent pension law changes have increased both the flat and variable premium rates used to determine the total annual premium paid to insure single-employer defined benefit plans. As a result, plan sponsors are and will be paying substantially higher premiums than they have in the past. For example, the flat rate premium in 2012 was $35 per participant; in 2016 it is $64 per participant, and will increase to $80 per participant in 2019. In 2012 the variable rate premium was $9 per $1,000 of unfunded vested benefits. For 2016 the variable rate premium is $30 per $1,000 of unfunded vested benefits and will increase to at least $41 in 2019.

A consequence of the dramatic rise in PBGC premiums is that the penalty for submitting premium payments after they are due, i.e., filing late, has also increased, as the penalty imposed by the PBGC is determined as a percentage of the unpaid premium. Currently, the penalty for plan sponsors that self-correct an underpaid filing is 1% per month (capped at 50%) of the unpaid amount. A plan sponsor can self-correct a late filing as long as the PBGC has not notified the plan sponsor that there is or may be an underpayment. For plan sponsors that receive notice from the PBGC that there is, or may be, an underpayment, the penalty is 5% per month (capped at 100%) of the unpaid amount.

The PBGC recently proposed a reduction to the penalty amount to reduce the financial burden imposed on plan sponsors. The proposed rule change would reduce the penalty by 50%; the self-correcting penalty will be reduced from 1% to 0.5% per month with a 25% cap and from 5% to 2.5% per month with a 50% cap for filings in which the PBGC gives notice.

The PBGC also proposed creating a new penalty waiver for plan sponsors that have a “good” compliance history and that act promptly to correct any underpayments. A plan would be considered to have a good compliance history if payment of all premiums for the five plan years preceding the year of the delinquency was made on time. A late payment would not be assessed against a plan if the PBGC did not require payment of a penalty (e.g., when an entire penalty is waived). The PBGC would consider the correction to be prompt if the premium shortfall for which the penalty is assessed was made good within 30 days after the PBGC notified the plan in writing that there was, or might be, a problem. If both of the conditions are met, the PBGC will waive 80% of any resulting penalty. Under this scenario, the penalty would be reduced from 2.5% per month to 0.5% per month, which is the same amount as if the plan had self-corrected.

This proposal could drastically reduce the financial burden imposed on a plan for underpaid and late filings. For example, a plan with a $1 million premium that is two months late (after notice from the PBGC) would have a $100,000 penalty (two months at 5% per month times the amount outstanding) under the current regulation. Under the proposed regulation, this penalty would be reduced to $50,000. The penalty could be further reduced to $10,000, if the plan is eligible for the compliant plan partial waiver of 80%.

Comments on the proposal are due to the PBGC by June 27, 2016. Only after the comments are reviewed and finalized will plan sponsors know when these new reduced penalties would be effective. Until then, plan sponsors are urged to file on time to avoid the mandated penalties.

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 application of the Central States, Southeast and Southwest Areas (Central States) pension plan 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)”
• “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’s 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.