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Pension plan summary plan description updates: Something easy to forget?

March 27th, 2015 No comments

Kamenir-JeffIt can be easy to lose sight of the requirement to periodically update a pension plan summary plan description (SPD) because SPDs no longer need to be filed with the U.S. Department of Labor. Plan sponsors can potentially find themselves more focused on annual governmental filings such as Form 5500, Pension Benefit Guaranty Corporation (PBGC) premium, Schedule 8955-SSA, and annual participant notifications such as the annual funding notice. But don’t overlook required SPD updates.

SPDs are required to be updated every five years if there have been any material plan changes since the last SPD update or every 10 years no matter what. SPDs should be carefully drafted to be consistent with the provisions of the official plan document.

Updated SPDs should be provided to all plan participants which would include actives, terminated deferred vested, retirees, and beneficiaries. New active participants should be provided an updated SPD within 90 days of becoming eligible to participate in the pension plan.

In the event there is a material plan change after the issuance of an updated SPD, a summary of material modification (SMM) should be provided within 210 days after the end of the plan year in which the change was adopted. A SPD updated to reflect the plan change can be provided in lieu of providing an SMM.

SPDs can be provided to plan participants either by mail, distribution at the plan sponsor’s work place or posted on the plan sponsor’s employee benefits website.

Not having an updated SPD can become an issue when participants have questions about their pension benefits. Having an updated SPD facilitates responding to participant questions.

Plan sponsors should review the latest version of the pension plan SPD to see if an update is required.

Three cautions when considering public pension reform

March 24th, 2015 No comments

Barrett-SheilaOnce a mainstay in American society, there has been a growing trend among public and private employers over the past three decades to close or freeze defined benefit (DB) plans. More recently, public DB plans have been in the forefront of the news with dark headlines detailing bankrupt public sectors unable to make good on their pension promises to retirees. The trend to downsize pensions coupled with some notorious public pension crises has led many to question whether DB plans have any place in the public sector at all. However, focusing on the horror stories from a few states or large cities is surely taking a myopic view of the situation.

The National Institute on Retirement Security (NIRS) recently published a follow-up study comparing the expense of defined contribution (DC) and DB plans. The study, published in December 2014, follows up on the original study performed in 2008, which reported similar results. The authors, William Fornia and Nari Rhee, indicate there are several advantages to DB plans that should be considered over the long term. These authors and the NIRS study provide three specific reasons for the cost savings of DB plans:

Risk pooling: DB plans spread the risk associated with employee life expectancy across the entire participant population. An easy way to conceptualize this is a bell curve—while some employees will live an “average” life span, there will always be employees who live longer and employees who live shorter lives. Those who live longer will use more retirement income than expected, but this cost is offset by the savings from those with shorter life spans. Without risk pooling, an individual bears the entire longevity risk alone; there is no cost offset mechanism for an individual who lives beyond his or her life expectancy.
Asset pooling: DB plans have significantly larger asset pools than an individual will maintain in an individual account plan. DB plans are also able to make multigenerational investments. While an individual will shift an investment strategy to be more conservative in the years leading up to retirement, a DB pension trust has no need to behave similarly as the trust can continue to maintain an investment strategy with some degree of aggressiveness. This yields better long-term investment results.
Fee pooling: The microeconomic concept of economies of scale comes into play for investors. An individual managing a single 401(k) account will bear the burden of professional investment fees. A DB plan has two advantages in this area. The first is that professional fees are paid out of the pooled asset trust and essentially split up among all individuals in the plan. The second advantage involves “investor IQ.” The typical DC plan participant does not have the investor knowledge of a professional asset manager. While a DB plan can afford to hire a professional asset manager and glean good returns, an individual is left to navigate the murky waters of the financial economy without an educated guide (National Institute on Retirement Security, 2014).

The NIRS also published a study in September 2011 highlighting public employee perspectives on public DB versus DC plans. If public entities intend on remaining competitive in the job market, maintaining their public pension plans could be a key to successful recruitment. Private pension plans are scarcer than their public counterparts, so this can be a factor for highly talented individuals looking at stable career choices.

For these reasons, a DB plan has significant, long-term advantages. These structural factors are relevant in any employment sector, but for public pension plans there is an additional angle to consider. Because the cost of public employees’ retirement plans are ultimately laid on the taxpayer, it should be a priority of any such system to use tax-funded contributions as efficiently as possible.

Last year’s NIRS study demonstrates that DB plans are truly efficient mechanisms for generating retirement income. But recent public discourse has suggested that public employers move away from DB plans. Thus, many retirees may be at risk of having a shortfall in their retirement incomes and will need to turn to the government for means of additional financial support. Social welfare programs are already in place to provide for retirement shortfalls, but these resources are not equipped to handle the long-term risk associated with today’s retirees.

In a broad sense, taxpayers will be on the hook regardless—either by paying for government DB plans or for government-subsidized welfare programs to supplement inadequate retirement income. The factors brought to light by the NIRS study reaffirm that the taxpayer dollar is put to more efficient use in a DB plan.

Employee communications: Transition to a VAPP

March 20th, 2015 No comments

tenBroek-HeidiRetirement plan sponsors are increasingly considering transitioning their current retirement plans to variable annuity pension plans (VAPPs). This allows them to have stable costs like those of a 401(k) plan, while providing participants with reliable, lifelong income like a traditional pension plan.

Communicating the change to a VAPP, however, may feel daunting for plan sponsors. Effective communications ensure that employees understand how the VAPP works, how it will affect them, and why a VAPP is a stable retirement solution for the sponsor and for them. Breaking down plan concepts into digestible, clear messages is key. Using a variety of communication vehicles—meetings, newsletters, personalized projections, etc.—increases the odds of success. In fact, we’ve found employees are excited about VAPPs once they understand how they work.

A short video created for employees can be one of your most powerful tools in communicating a new kind of benefit. The combination of images, written text, and oral explanations are very effective in conveying how a VAPP works. It provides a solid foundation and a basic understanding that makes the detailed communications to follow more accessible. Below is a sample video created as an introduction to a VAPP transition.

For more Milliman perspective on VAPPs, click here.

UK pension reform offers new opportunity

March 5th, 2015 No comments

People retiring after April 1 in the United Kingdom will have the freedom to do whatever they like with the money from their various pension plans. This FT Adviser article by Milliman’s Colette Dunn and Russell Ward offers perspective on the effect reform will have on an individual’s risk and also on the impact on defined contribution pension schemes.

Here is an excerpt:

To reflect changing retirement patterns and provision, DC schemes need to offer flexibility. Individuals want the flexibility to postpone retirement and/or phase pension income, to align with continued participation in work. These are two fundamental ways for individuals to manage the risk that pension income will be less than they require. Flexibility to integrate the Nest pension with other pensions so that the total pension income is level could also be beneficial. Individuals also want to have their money when they need it. In other words, they require flexibility in terms of sequencing. For example, individuals may want a lump sum when they retire to update their house, buy a new car or go on holiday. They may also need an increased income towards the end of their retirement if they need to fund care costs.

It is clear that the next generation of products need to enable ongoing advice. As the circumstances of the retiring individual evolve, their retirement solution must have the ability to adapt, so that they can respond dynamically to changing needs.

Given an individual’s need for certainty in retirement, we expect guarantees to remain in demand for at least part of their solution.

…The new environment provides an opportunity for advisers to help individuals throughout their retirement, and for providers to offer solutions which recognise the changing needs and regulatory environment. This will enable individuals to make better choices which provide improved risk-adjusted returns on their retirement savings and deliver a better overall chance of meeting their goals. The tools and techniques required to deliver these solutions are available now.

Milliman infographic: Variable annuity pension plan

February 25th, 2015 No comments

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.

vapp-2-1000x

GASB 67/68: Special Funding Situations

February 19th, 2015 No comments

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.

Retirement plans: Key dates and deadlines for 2015

February 13th, 2015 No comments

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.

VAPPs: Coming soon to a retirement plan near you?

February 12th, 2015 No comments

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.

Variable annuity pension plan reading list

February 9th, 2015 No comments

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.

UPDATED: PBGC will collect data on pension plan de-risking measures

February 5th, 2015 No comments

Herman-TimThe 2015 premium filings to the Pension Benefit Guaranty Corporation (PBGC) requires the reporting of information about the de-risking activities of pension plans as part of their annual premium payment filings. The data set includes participant counts split between participants in and not in pay status for both lump-sum windows and annuity purchases in the last two years. For lump-sum windows, the participant counts include those eligible for the window and the actual number who elected a lump-sum under the window. For annuity purchases, the participant counts are limited to those for whom an annuity was purchased. If accurate data are not available, then reasonable estimates are acceptable. Finally, data are not required to be reported if the lump-sum window closed or the annuity purchase was made less than 60 days before the premium filing is made. So for a calendar year plan that files the 2015 premium filing on October 15, 2015, the information to be provided encompasses de-risking activities from January 1, 2014, through August 16, 2015.

It will be interesting to watch what the PBGC does with the information it collects. According to the PBGC, it is interested in collecting this data because “information about risk transfers is critical to PBGC’s ability to assess its future financial condition.” Back in 2013, Joshua Gottbaum, then executive director of the PBGC, reported to the ERISA Advisory Council that pension plan lump-sum cash-outs to retirees are like cigarettes: they are legal, many people like them, and they are bad for you. With the current financial condition of the PBGC and its role in protecting participants’ pension rights, it may be that the PBGC is interested in providing more detailed regulation on the de-risking activities of pension plan sponsors.

During the past several years, we have seen many of our clients undertaking both lump-sum windows and looking into annuity purchases. For the 2014 year-end accounting disclosures, historically low interest rates combined with updates to mortality assumptions have driven up the calculated pension obligations. As a result, companies will be reporting very large pension deficits on their balance sheets. Because of the impact of pension plans’ funded status on corporate financial statements, the interest of companies in de-risking activities will continue and may even increase from prior levels.

Please contact a Milliman consultant to discuss if lump-sum windows are right for your situation.