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Archive for the ‘Defined benefit’ Category

HATFA provides opportunities to reduce 2013 and/or 2014 cash contributions and 2014 PBGC premiums

August 22nd, 2014 No comments

Herman-TimThe recently enacted Highway and Transportation Funding Act of 2014 (HATFA-14) provides opportunities for plan sponsors to reduce cash contributions and PBGC premiums. For the approaches that involve contributions for the 2013 plan year, prompt action is needed to ensure the applicable funding requirements are satisfied. For calendar year plans, the final date to designate cash contributions and/or add excess contributions to the prefunding balance for the 2013 plan year is September 15, 2014.

HATFA opportunities
1. Reduce cash contributions required for the 2013 plan year.
• Plan sponsors may optionally revise the 2013 actuarial valuation (absent an election to opt out of the HATFA relief for 2013).
• With the use of the higher interest rates for the cash funding valuation, the minimum required contribution may be lower.

2. Reduce cash contributions required for the 2013 and 2014 plan years
• Plan sponsors may optionally revise the 2013 actuarial valuation (absent an election to opt out of the HATFA relief for 2013).
• Plan sponsors are required to revise the 2014 actuarial valuation.
• With the use of the higher interest rates for the cash funding valuations, the total minimum required contributions (combined 2013 and 2014 plan years) may be lower.

3. Reduce 2014 PBGC variable rate premiums
• Revise the 2013 actuarial valuation to reduce the minimum funding requirements for the 2013 plan year.
• Revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year.
• Confirm that contributions are sufficient to satisfy both 2013 and 2014 minimum funding requirements.
• Designate some or all of the cash contributions previously used for the 2014 plan year as receivable contributions for the 2013 plan year.
• This reduces the unfunded liability for PBGC variable rate premium.

4. Manage credit balances for 2013 and 2014 plan years
• Revise the 2013 actuarial valuation to reduce the minimum funding requirements for the 2013 plan year.
• Revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year.
• Confirm that contributions are sufficient to satisfy both 2013 and 2014 minimum funding requirements.
• Create/use credit balances to optimize the plan sponsor’s use of cash.

Some plan sponsors may decide forego the opportunities provided by HATFA. One example is a plan sponsor with planned cash contributions to reach a specified funding threshold. These plan sponsors will still need to revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year (required). However, they may elect to opt out of the HATFA relief for 2013 and satisfy 2013 plan year minimum funding requirements by making contributions based on the 2013 actuarial valuation results prepared under the MAP-21 rates.

Cash savings opportunities under HATFA 2014 will vary by a plan’s funded status, amount of credit balances available, etc. Also, different plan sponsors will have different goals and objectives regarding cash funding to the pension plan. Your Milliman consultant can help you review the opportunities that are available and decide on a course of action that is appropriate for your situation.

Google+ Hangout: Pension Funding Index (August 2014) and the implications of HATFA

August 20th, 2014 No comments

The funded status of the 100 largest corporate defined benefit pension plans decreased by $5 billion during July as measured by the Milliman 100 Pension Funding Index (PFI). The deficit rose from $252 billion to $257 billion at the end of July, primarily due to declines in equity and fixed income returns during July. As of July 31, the funded ratio decreased from 85.3% to 85.0% since the end of June.

In this month’s PFI Hangout, Zorast Wadia discusses the study’s latest results and the pension smoothing provisions related to the Highway and Transportation Funding Act of 2014 (HATFA).

Corporate pension funded status drops by $5 billion in July

August 14th, 2014 No comments

Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest defined benefit pension plans. In July, these plans experienced a $3 billion decrease in pension liabilities and an $8 billion decrease in asset value, resulting in a $5 billion increase in the pension funded status deficit.

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For months it’s been interest rates driving up the deficit, but in July the rates cooperated and it was instead poor financial market performance negatively impacting funded status. We’ve seen the deficit increase by more than $70 billion so far in 2014.

This month’s study includes perspective on how the Highway and Transportation Funding Act of 2014 (HATFA) may affect pension contributions next year.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.4% median asset return for their pension portfolios, and if the current discount rate of 4.10% were maintained, funded status would improve, with the funded status deficit shrinking to $237 billion (86.1% funded ratio) by the end of 2014 and to $202 billion (88.2% funded ratio) by the end of 2015.

Is pension outsourcing right for you?

August 5th, 2014 No comments

Benbow-DavidThere has been much discussion about the relevance of the defined benefit (DB) pension plan. For decades, people have bemoaned the demise of DB plans, saying they are too costly to administer and too expensive to maintain. Others have suggested that there is no other type of plan that will provide a sufficient and stable source of retirement income. There has been a growing trend of top employee benefit providers shifting their DB outsourcing service models by partnering with firms such as Milliman, while others have opted to exit the DB outsourcing business completely, as recently announced by Vanguard.

Does that mean DB outsourcing is no longer relevant?

Outsourcing is more relevant than ever, but it’s become so specialized that it’s best handled by experts who do it as their core business. DB plan outsourcing was once very expensive, but technology and economies of scale have made outsourcing much more affordable. Here are a few reasons why DB plan sponsors should consider outsourcing.

The changing of the guard
Many employers have a person (call her “Betty”) who has single-handedly administered a DB plan for years, maybe decades. Betty is friendly, she is dedicated, and she knows everything about the pension plan—including when to look people up in the big red binder. Betty is 62.

Not only is Betty going to retire someday, but she hasn’t trained anyone to take her place. Betty is very dependable, but has she stayed current on all the new pension legislation, and would her work stand up to an audit by the Internal Revenue Service or U.S. Department of Labor?

Because a change is imminent, someone else should also be considered with at least as much experience as Betty, someone who is familiar with the challenges of automating the information that’s in Betty’s head (and in the big red binder), and who keeps abreast of the latest pension rules—namely, a DB outsourcing provider.

Participant convenience
We’re more than a decade into the 21st century and, thanks to our laptops, tablets, and smartphones, we’ve gotten used to having information available instantly. Participants meeting with a financial planner will want to look up their pension benefits online as well as model a few different retirement dates to see what works best for them. Some outsourcing providers have this capability, which renders the annual pension statement obsolete (participants never bothered to look at them anyway).

Providing self-service options for participants also cuts down on requests to human resources departments (and Betty is pretty overloaded with requests for estimates).

For participants who still prefer human interaction, an outsourcing provider may include a call center of friendly DB experts, who have full access to the participant’s information. They can field questions ranging from plan eligibility to the ever-popular “Where is my check?”

Plan sponsor convenience
As mentioned earlier, DB plans have become much more complicated to administer. In order to calculate benefits consistently and efficiently, a dedicated system is required for all but the simplest plans.

Plan auditors are more confident with calculations produced by a pension system instead of hand calculations or clunky spreadsheets. System results can be stored indefinitely along with evidence that calculations were reviewed. In addition, many outsourcing providers are independently audited and can provide plan auditors with a Statement on Standards for Attestation Engagements No. 16 (SSAE 16 Type 2) report for additional reassurance.

With a dedicated pension system, plan sponsors can also have a wealth of data at their fingertips. Regular reports can be generated for compensation and benefits committees and data extracts for plan actuaries. Mailing lists for summaries of material modifications (SMMs) or annual funding notices are made much simpler.

Finally, with the day-to-day pension operations off its hands, the benefits department can focus on other, more urgent matters.

It takes a village
It takes quite a few people to administer a DB plan: Actuaries to measure plan funding and forecast liabilities, administrators to calculate benefits, representatives to answer participant phone calls, and payment processors to work with the trustee. A full service outsourcing firm houses all these roles under one roof, creating a seamless team of professionals to make life easier for plan participants and plan sponsors.

If you’re wondering whether Milliman can help with the administration of your DB plan or would like to see a demo of our administration system or participant website, feel free to contact me or visit www.milliman.com.

Plan language and administration can clarify beneficiary designation issues

July 31st, 2014 No comments

Determining the beneficiary of a qualified retirement plan after a participant’s death has legal ramifications. Plan sponsors should ensure that a plan’s benefit distribution language and plan administration meet federal requirements.

In this article, Milliman’s Dawilla Madsen and Dominick Pizzano examine key issues that sponsors should consider when reviewing and updating plan documents and administrative procedures to ensure compliance with current beneficiary designation rules.

Here is an excerpt:

Staying true to form
While clear and proactive plan and form designs are a great head start, the path toward deterring beneficiary disputes does not stop there. Plan sponsors also must efficiently and effectively:

• Communicate to participants the importance of completing and updating their beneficiary designation forms;
• Deliver to and retrieve the forms from the participants;
• Review the completed forms to ensure that they are accurate; and
• Maintain and manage the forms.

In addition, a best practice is for plan sponsors to periodically remind participants to review their beneficiary designations in the event of a change in family status.

Technology-based solutions can improve the above processes. For example, an electronic system for designating beneficiaries could ensure that all items are complete on a form before it can be submitted. Electronic storage makes retaining and reproducing (even on demand) designations easy. In addition, current electronic (e-signature) technology might help reduce claims of forgery. Unfortunately, current statutory and regulatory requirements for qualified plans make having a totally paperless process impossible. This is true even though:

• Under the spousal consent requirements, the spouse’s signature can be an electronic one in accordance with E-SIGN or state law, and
• Regulations permit a notary or plan representative to electronically acknowledge witnessing the spouse’s signature.

Despite these helpful rules, the spouse is still required to be in the physical presence of the plan representative or notary witnessing the signing of the consent form.

HATFA-14 and discount rates: The latest in “pension smoothing” provisions

July 28th, 2014 No comments

Yu-LynnOn July 15, 2014, the U.S. House of Representatives voted 367-55 to approve H.R.5021, the Highway and Transportation Funding Act (HATFA-14), which provides funding for the Highway Trust Fund on a short-term basis (through May 2015). HATFA-14 also includes an extension of the “pension smoothing” provisions that had been adopted in the Moving Ahead for Progress in the 21st Century (MAP-21) Act. The bill would extend the MAP-21 funding stabilization provisions for five years (through 2020).

MAP-21 was enacted in July 2012. MAP-21 uses a 25-year average of a bond yield curve, which produces significantly higher rates than the 24-month average used before MAP-21. MAP-21 then imposes the minimum and maximum rate using a 10% corridor around these average rates. The corridor for determining the minimum and maximum rate expands 5% each year, ultimately reaching 30% by 2016.

HATFA-14 revises the minimum and maximum percentage ranges for a plan year as follows:

• 90% to 110% for 2012 through 2017
• 85% to 115% for 2018
• 80% to 120% for 2019
• 75% to 125% for 2020
• 70% to 130% for 2021 or later

The proposals relating to the applicable minimum and maximum rates are generally effective for plan years beginning after December 31, 2012. Under a special rule, an employer may elect, for any plan year beginning before January 1, 2014, not to have these proposals apply either (1) for all purposes for which the proposals would otherwise apply, or (2) solely for purposes of determining the plan’s adjusted funding target attainment percentage in applying the benefit restrictions for that year. A plan will not be treated as failing to meet the requirements of the anti-cutback rules solely by reason of an election under the special rule. By electing out in 2013, plans that have already prepared the 2013 Form 5500 will not be disrupted.

This is great news for plan sponsors who have short-term cash flow issues. Even though the Pension Benefit Guaranty Corporation (PBGC) variable rate premium calculation does not use rates under HATFA-14 relief, there was no PBGC premium increase in this bill, unlike MAP-21. Upon HATFA-14 being enacted, our first course of action will be to revisit 2013 plan year valuations. This should make for more exciting times in the world of pension funding!

Why DB plans should still be relevant

July 18th, 2014 No comments

Hart-KevinFor well over a decade now, defined contribution (DC) plans have been all the rage. Most new retirement plans are DC plans, a lot of which are 401(k) plans. And some defined benefit (DB) plans that do exist are being frozen or terminated and replaced with new or enhanced DC plans. Throughout these changes in retirement plan types, a common question is arising: Is there any room in the retirement benefit world for DB plans?

The answer should be a resounding “Yes.” DB plans should continue to remain relevant because they provide benefit features that can’t be offered in DC plans. This doesn’t mean that DB plans make sense for every employer, but they should make sense for certain employers.

Let’s start with the most obvious difference between DB plans and DC plans. Under a DB plan, employees generally do not bear the investment return risk. Certain employers could see this as a benefit. By offering their employees a DB plan, employers are providing a “guaranteed” benefit that is generally defined by a specific formula. Employees could see this as a much more attractive option than a DC plan.

Some employers may be looking to provide significant retirement benefits. It is possible to allow employees to earn a retirement benefit of up to 100% of their compensation in a qualified DB plan. This level of retirement benefit is not generally available under a qualified DC plan, which is due to the limits on annual employer contributions.

DB plans can be used by employers to better manage their employee workforce. They can be used to either encourage early retirements or incentivize longer tenures, whereas DC plans cannot do either. DB plans can have early retirement eligibility provisions that provide for subsidized early retirement benefits. A typical early retirement provision would allow for subsidized early retirement benefits to be available at age 55 (provided enough years of service have been earned). This allows employees to receive retirement benefits beginning at age 55 and provides an incentive for employers that want a certain portion of their workforces to begin terminating and retiring prior to age 60. In addition, DB plans have the opportunity to offer voluntary staff reduction programs. Employees can be encouraged to retire earlier than they were possibly considering through an early retirement incentive program. DB plans usually provide more valuable benefits for employees that have a longer tenure with their employers. So providing a DB plan incentivizes employees to stay with their employers for a longer period because of the typical benefit structure in DB plans. And employees that are planning on staying with their employers for a long period may seek out an employer that offers a DB plan.

A DB plan may not be the best choice for every employer. However, DB plans should still remain relevant because they can provide features and benefits that cannot be provided by DC plans.

Google+ Hangout: Pension Funding Index, July 2014

July 15th, 2014 No comments

The funded status of the 100 largest corporate defined benefit pension plans increased by $14 billion during June as measured by the Milliman 100 Pension Funding Index (PFI). The deficit improved from $266 billion to $252 billion at the end of June, which is primarily due to investment gains. As of June 30, the funded ratio rose from 84.5% to 85.3%. However, the funded ratio is still down for the year from 88.3% as of December 31, 2013. June was the first month in 2014 when discount rates increased, but only by 0.02%. Fortunately, the strong year-to-date asset performance has mitigated deeper funded status erosion.

Index co-author Zorast Wadia discusses the results on Milliman’s monthly PFI Google+ Hangout with Jeremy Engdahl-Johnson.

Corporate pension funded status improves by $14 billion in June

July 10th, 2014 No comments

Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest defined benefit pension plans. In June, these plans experienced a $3 billion decrease in pension liabilities and an $11 billion increase in asset value, resulting in a $14 billion decrease in the pension funded status deficit.

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If you want to understand why pension funded status is down this year, consider the fact that June was the first month in 2014 with rising interest rates—and it’s not like we saw a massive swing. Interest rates continue to be the story with these pensions.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.4% median asset return for their pension portfolios, and if the current discount rate of 4.08% were maintained, funded status would improve, with the funded status deficit shrinking to $228 billion (86.7% funded ratio) by the end of 2014 and to $173 billion (89.9% funded ratio) by the end of 2015.

Google+ Hangout: Pension Funding Index, June 2014

June 18th, 2014 No comments

The funded status deficit of the 100 largest corporate defined benefit pension plans increased by $10 billion during May as measured by the Milliman 100 Pension Funding Index (PFI). The $268 billion deficit at the end of May is primarily due to a drop in the benchmark corporate bond interest rates used to value pension liabilities. Investment gains helped to partially offset the full extent of liability increases in May. During May, the funded ratio fell from 84.7% down to 84.3%.

PFI co-author Zorast Wadia discusses the index’s latest results on this Milliman Google+ Hangout.