Category Archives: Pensions

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.

What’s ahead for RP-2014 mortality table users?

Hagin NeilThe Society of Actuaries Retirement Plans Experience Committee (RPEC) published an October 2014 study analyzing mortality experience of uninsured private defined benefit pension plans in the United States for the period 2004 through 2008. It is referred to as the “RP-2014” mortality table report. RP-2014 replaces RPEC’s “RP-2000” mortality tables published in July 2000.

While the RP-2014 report may imply there is only one mortality table, there are several mortality tables published within the report. A companion report was concurrently published detailing a “mortality projection scale,” referred to as the “MP-2014” improvement scale. Because mortality studies are not completed all that frequently, mortality improvements scales are developed to be used in conjunction with a mortality table to project future mortality improvements.

Since the release of the two RPEC reports, defined benefit pension plan sponsors felt compelled to reflect the longer life expectancies in the determination of defined benefit plan liabilities for financial disclosures. For those plan sponsors that elected to change the plan’s mortality assumption to RP-2014 with projection scale MP-2014, it generally increased the plan’s liability between 4% and 10%. The impact on a plan was dependent on that plan’s demographics as well as on the mortality table that was previously used.

RPEC published a revised mortality improvement scale in October 2015, appropriately labeled “MP-2015.” Additional mortality data published by the Social Security Administration (SSA) was used for the new calculation.

RPEC had indicated within the MP-2014 report that it intends to publish updated improvement scales at least triennially. However, an updated report issued one year after RP-2014 was a surprise to defined benefit pension plan sponsors, as well as many pension actuaries.

The MP-2014 mortality improvement scale was constructed based on a model developed by RPEC utilizing SSA mortality data between 1950 and 2009. The MP-2015 mortality improvement scale incorporates two additional years of SSA data (2010 and 2011). The SSA data indicates that mortality rates remained relatively constant for 2010 and 2011. This is in contrast to the expectations of the MP-2014 calculations, which predicted mortality improvement for this period. Plans that utilized the RP-2014 mortality table with MP-2014 mortality improvement scale may see a 0% to 2% decrease in plan liabilities by utilizing the MP-2015 mortality improvement scale in their fiscal year-end financial disclosures.

The SSA has recently released two additional years (2012 and 2013) of mortality data, which again indicate that the mortality rates are not decreasing as significantly as expected. In fact, this newly released data suggests that mortality rates have been stagnant over the last five years. The RPEC committee has indicated that it intends to issue future periodic updates to the model as soon as practicable, following the public release of updated data upon which the model is constructed.

The question is when will a new mortality improvement scale, reflecting the latest SSA data from 2012 and 2013, be released? Will RPEC issue “MP-2016,” a new mortality improvement scale reflecting the latest SSA mortality data?

The MP-2015 report states that RPEC will not publish any additional information before the second quarter of 2016. Unfortunately, because of the timing of the release, a new mortality improvement scale (MP-2016 potentially) will not be available for disclosures with fiscal years ending in 2015. However, the updated mortality improvement scale may be able to be incorporated into the net periodic pension expense determination for fiscal years ending in 2016. This will be dependent on the timing of the RPEC analysis and publication, as well as approval by the plan sponsor’s auditor.

Cost Accounting Standards in the defined benefit arena

Jo-SamCongress established the original Cost Accounting Standards Board (CASB) in 1970 to ensure consistency in the cost accounting principles used by defense contractors and subcontractors, as the results of these calculations are used to request reimbursements for their costs from the federal government. These Cost Accounting Standards apply in many areas, including the calculations of the costs of benefits available to a group of participants covered under a qualified defined benefit plan. These standards have been updated over time to reflect changes in the law, most recently because of the implementation of the Pension Protection Act of 2006 (PPA). As a result, plan sponsors should be familiar with the nuances of the changes in the Standards in order to be sure that they are requesting the appropriate levels of reimbursement for their costs.

Cost Accounting Standard No. 412 (CAS 412) describes the procedures used to determine and measure the various components of pension cost. Cost Accounting Standard No. 413 (CAS 413) provides guidance for adjusting pension cost by measuring actuarial gains and losses and assigning such gains and losses to cost accounting periods. CAS 413 also provides the basis on which pension cost shall be allocated to segments of an organization.

Pension costs under CAS 412
For defined benefit pension plans (excluding plans accounted for under the pay-as-you-go cost method), the components of pension cost for a cost accounting period are:

(1) Normal cost.
(2) Amortization of any unfunded actuarial liability. A new amortization base will be established for any plan or assumption changes.
(3) Amortization of actuarial gains and losses.

Amortizations will be adjusted for interest.

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Weighing income options can prepare individuals for retirement

Pushaw-BartPension plans are providing an ever-decreasing portion of retirement wealth as wave after wave of Baby Boomers reach retirement. In and of itself, this is neither surprising nor remarkable. What is remarkable, though, are two typical characteristics of what we are being left with regarding retirement wealth.

First, the jettison of pension plans means relying on defined contribution plans as the provider of principal retirement wealth. This is suboptimal inasmuch as these plans are typically 401(k) savings plans, originally introduced as a sideline fringe benefit scaled for purposes less than what they’re now required to deliver on. This is mostly a benefit-level issue of which we have seen recent hints of amelioration—namely, the industry recognizing that in an all-account-based retirement world, saving 16% of annual pay is in the ballpark, not the historical mode of 6% employee deferral (plus maybe 6% employer match totaling 12%). This relates to the second endangered characteristic, which needs to be brought into brighter focus: an in-plan solution for generating guaranteed retirement income.

Pension plans are wonderful for participants in that everyone is automatically a participant, automatically earning benefits on a meaningful trajectory, and automatically having the ultimate retirement wealth delivered on a lifetime guaranteed basis. Yes, 401(k) plans are trending this way on the first two, and the third is quickly emerging as another area where we need more pension-like alternatives.

One may generalize by saying that retirees take their 401(k) balances and roll them over when they retire. An economic conundrum baffling academics is that none or very few of these folks take advantage of insured annuities even in the midst of robust studies identifying them as an optimal solution for retirement income in face of investment uncertainty and longevity risks. This raises two subtle yet important points.

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Changing public pension investment landscape

The global financial crisis shrunk the funding status of many public pensions. Some sponsors are beginning to cut their expected rate of return, and change the way they invest and handle portfolio risk. In this Reuters article, Milliman consultant Tamara Burden provides perspective on how sponsors can better manage their pension investment risk.

The growing recognition that short-term volatility can have a devastating impact on mature pension plans in the $4 trillion sector could herald a sea change in the way public funds invest in the future.

“There is this shift to recognizing risk is a relevant piece of the discussion, it’s not just about how you get the highest returns over a long period of time but that short-term fluctuations in asset levels can be incredibly detrimental,” said Tamara Burden, an actuary at consulting firm Milliman….

Burden is seeking to persuade public pension managers to use Milliman’s risk management strategy to reduce equity exposure in portfolios by shorting stock index futures. This means they don’t have to sell their fund’s equity holdings.

The strategy is being applied to about $70 billion in portfolios with variable annuities, retail mutual funds and collective investment trusts used by 401(k) plans, but so far not in the public pension sector.

Interest, Burden says, has increased this year with about 15 public pension administrators considering a shift versus five during the same period last year.