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Archive for the ‘Defined benefit’ Category

Pensions remain an important part of retirement security

January 16th, 2015 No comments

Defined benefit (DB) plans are still relevant even though defined contribution (DC) plans have become more common. In the latest DB Digest, Milliman’s David Benbow highlights a 1970 article by actuary Bill Halvorson that looks 30 years in to the future of DB plans. David also explains why the best possible retirement solution would combine DB and DC plans in addition to Social Security.

Here is an excerpt:

Reading this article from 1970 is like opening a time capsule. And, while Bill Halvorson didn’t predict everything that would happen to pensions, he did say a few things that ring very true nearly 50 years later.

Bill speculated that Social Security would spiral out of control and that if pensions integrated with Social Security, they would be diminished. This would lead to the emergence of savings plans, thrift plans, and profit-sharing plans as the only viable way to supplement expanding Social Security.

Bill also suggested that funding regulations would strangle private pensions…

DB plans are not dead. Not yet, anyway. And I, for one, hope that the pendulum will swing back toward the stability of some form of DB plan because as life expectancy increases, so does the likelihood of outliving your savings. The best solution is likely a combination of DB and DC plans in addition to Social Security. The DC balance could be designed to provide income for a fixed number of years, at which time the DB plan (or “longevity plan”) would kick in and provide lifetime income at later ages, while Social Security would provide inflation-adjusted lifetime income. Because DB benefits would be paid over shorter life expectancies, the funding would be much less volatile.

Milliman Hangout: Pension Funding Index, January 2015

January 13th, 2015 No comments

The funded status for the 100 largest corporate defined benefit plans decreased by $22 billion during December 2014, according to the Milliman 100 Pension Funding Index (PFI). Historically low interest rates were the dominant factor in the $105 billion deficit increase during 2014. While higher than expected investment returns produced a solid $81 billion gain, pension liabilities increased by $186 billion. The funded ratio was 83.6% as of December 31, 2014, down compared with the ratio on December 31, 2013, of 88.3%.

For more perspective on the January’s PFI watch our latest Milliman Hangout featuring co-author Zorast Wadia.

Corporate pension funding deficit grows by more than $100 billion in 2014 because of plummeting interest rates

January 7th, 2015 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 December, these plans experienced a $19 billion increase in pension liabilities and a $3 billion decrease in asset value, resulting in a $22 billion increase in the pension funded status deficit and a funded ratio of 83.6%. For the year, despite market returns of $81 billion, these pensions experienced a $105 billion increase in the pension funded status deficit, fueled by a $186 billion increase in liabilities as interest rates fell to a historic low at year end.

1947MEB_Fig1_600x280

What a difference a year makes. Last year at this time we were celebrating a historic rally for these pensions, thanks to—surprise surprise—cooperative interest rates. This year it’s the opposite story, with interest rates falling to 3.80%, the lowest rate we’ve ever seen in the 14-year history of this study. With rates this low, the liability increase for these pensions outstripped strong asset performance by more than $100 billion.

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 3.80% were maintained, funded status would improve, with the funded status deficit shrinking to $255 billion (85%.7 funded ratio) by the end of 2015 and to $217 billion (87.9% funded ratio) by the end of 2016. This forecast assumes 2014 aggregate contributions of $44 billion and 2015 and 2016 aggregate contributions of $31 billion.

Considerations in deciding whether or not to terminate a frozen pension plan during 2015

December 11th, 2014 No comments

Kamenir-JeffThe recent issuance by the Society of Actuaries of a new mortality table for possible use in valuing pension liabilities has some plan sponsors thinking they should consider terminating their frozen pension plans by the end of 2015. The plan termination consideration is due to speculation that the Internal Revenue Service (IRS) may require the use of the new mortality table for calculating lump-sum distributions of pension benefits beginning in 2016, which would increase lump-sum amounts. There are many other considerations beyond the possible timing of the new mortality table that a plan sponsor should take into account before deciding to terminate a frozen pension plan by the end of 2015, which are summarized below.

In support of 2015 plan termination:

1. Avoidance of scheduled increases to Premium Benefit Guaranty Corporation (PBGC) premium rates after 2015.
2. No prospective concerns about trying to annually manage pension cost volatility.
3. Elimination of annual administration costs.
4. If a lump-sum distribution is offered, active participants have the opportunity to have immediate access to the value of their frozen benefits.

Disadvantages of 2015 plan termination:

1. Lump-sum and annuity purchase liability interest rates are currently very low, which results in higher plan termination liabilities.
2. A large one-time pension settlement accounting loss may be incurred on the company’s financial statements.
3. A very large pension contribution may be necessary to fully fund plan termination liabilities, which in part is due to the low interest rate environment.
4. A plan termination is a time-consuming process with various steps required, including trying to locate missing participants.
5. Recent funding relief legislation may result in lower minimum required contributions over the next several years.

In order to accomplish a plan termination by the end of 2015, a plan sponsor will need to make a decision to terminate early in 2015 to account for the entire plan termination process. The decision process should include discussing with the plan’s legal counsel whether or not it is advisable to distribute plan assets following PBGC approval but prior to IRS approval of the plan termination.

Google Hangout: Pension Funding Index, December 2014

December 5th, 2014 No comments

The funded status of the 100 largest corporate defined benefit pension plans fell by $8 billion during November as measured by the Milliman 100 Pension Funding Index (PFI). The deficit widened from $263 billion to $271 billion, which was primarily due to another decrease in the benchmark corporate bond interest rates used to value pension liabilities. The funded ratio declined from 84.8% to 84.6% at the end of November.

PFI coauthor Zorast Wadia offers some perspective on the latest results in this Milliman Google+ Hangout.

Corporate pension funded status drops another $8 billion in November

December 4th, 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 November, these plans experienced a $26 billion increase in pension liabilities and an $18 billion increase in asset value, resulting in an $8 billion increase in the pension funded status deficit.

1927MEB_Fig1

The story this year seems to be the same month after month, and in November it’s exactly the same as it was in October—an $8 billion increase in the funded status deficit, with liabilities exceeding positive asset performance. For the year, interest rates have dropped by 79 basis points, driving a $167 billion liability increase.

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 3.89% were maintained, funded status would improve, with the funded status deficit shrinking to $230 billion (87% funded ratio) by the end of 2015 and to $191 billion (89.2% funded ratio) by the end of 2016. This forecast assumes 2014 aggregate contributions of $44 billion and 2015 and 2016 aggregate contributions of $31 billion.

Fund pensions and reduce PBGC premiums by borrowing cash

December 4th, 2014 No comments

Pension Benefit Guaranty Corporation (PBGC) premium rates are going to rise threefold by 2016. Consequently, companies sponsoring underfunded defined benefit plans will have to pay higher annual premiums. A solution that could lower or eliminate PBGC premiums is to borrow cash to fund a pension. This Plan Sponsor article authored by Milliman’s Will Clark-Shim offers perspective.

Here’s an excerpt:

Plan sponsors may not have the cash to contribute to their plans; another option is to borrow money to fund the pension plan.

This may sound like leverage, but plan sponsors already owe the pensions. The PBGC values those pensions as if they were AA-rated corporate debt. If a plan sponsor borrows money, funds the pension plan, and invests the borrowed proceeds in AA-rated corporate debt, it has roughly swapped one type of debt for another. The goal here is not to beat the market; the goal is to avoid paying a “tax” of 2.9% per year…

How much can plan sponsors save? Illustratively, if a plan sponsor pays 6% interest on its debt, invests the proceeds at 4% in long-duration corporate bonds, and forgoes 2.9% PBGC premiums, it saves 0.9% per year. On $20 million, that would be $180,000 per year, prior to taxes.

In addition, the pension contributions and the interest on the plan sponsor’s debt are generally tax-deductible. That may mean some tax relief above and beyond the PBGC premium savings. The higher the company’s taxes, the greater the potential tax advantages.

To learn more about this pension risk management solution, read Clark-Shim and Chris Jasperson’s article “Borrowing money to reduce PBGC premiums.”

GASB 67/68: Proportionate share allocation

November 19th, 2014 No comments

This PERiScope article in Milliman’s Governmental Accounting Standards Board (GASB) Statements No. 67 and 68 miniseries discusses the allocation of financial reporting liabilities for cost-sharing multiple employer plans.

Under the new GASB 67/68 rules, a cost-sharing multiple-employer pension plan is a plan that is used to provide pensions to employees of more than one employer, and plan assets are pooled such that they can be used to pay the benefits of the employees of any employer. Other plan types defined under the new GASB statements include single employer plans (where a plan involves only one employer), and agent employer plans (where assets of one employer may not legally be used to pay the benefits of the employees of any other employer). For cost-sharing plans, a “proportionate share” for each employer must be developed to distribute the aggregate plan liability and expense among the employers’ financial statements. An individual employer’s proportionate share will almost certainly change from measurement date to measurement date, and the financial impact of this change must be quantified. In addition, to the extent that an employer makes actual contributions during the year that are different from its allocated proportionate share of contributions, this difference must also be tracked and accounted.

Google+ Hangout: Pension Funding Index, November 2014

November 17th, 2014 No comments

The funded status of the 100 largest corporate defined benefit pension plans fell by $8 billion during October as measured by the Milliman 100 Pension Funding Index (PFI). The deficit widened from $255 billion to $263 billion at the end of October, which was primarily due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. As of October 31, the funded ratio declined from 85.1% to 84.8%.

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

Nondiscrimination testing: Minimum allocation gateway

November 11th, 2014 No comments

Peatrowsky-MikeA defined contribution (DC) plan can test on a benefits basis if it meets any of the following criteria:

• Provides broadly available allocation rates
• Provides age-based allocations
• Provides a minimum allocation gateway to non-highly compensated employees (NHCE)

A plan satisfies the minimum allocation gateway test if each NHCE has an allocation rate, which is determined using Internal Revenue Code (IRC) Section 414(s) compensation, that is at least one-third of the highest allocation rate of any highly compensated employee (HCE) participating in the plan.

Alternatively, a plan is deemed to satisfy the gateway test if each NHCE receives an allocation of at least 5% of the employee’s IRC Section 415 compensation. Therefore, a DC plan designed to provide a minimum allocation of at least 5% to NHCEs will always be eligible to be cross-tested for nondiscrimination testing.

Aggregated DB/DC plans
To satisfy the minimum gateway for an aggregated defined benefit (DB)/DC plan, each NHCE must have an aggregate normal allocation rate (ANAR) that meets the following requirements:

Nondiscrimination testing graph

Instead of using each NHCE’s equivalent allocation rate under a DB plan in calculating the aggregate allocation rate, it is permissible to use the average of the equivalent allocation rates of all NHCEs benefiting under the DB plan.

Who must receive the minimum allocation gateway?
Employees who receive a safe harbor nonelective contribution, a top-heavy minimum contribution, or a qualified nonelective contribution (QNEC) must receive a minimum allocation gateway contribution, unless they are separately tested under 401(a) as part of a disaggregated group.

If you have questions regarding the minimum allocation gateway, please contact your Milliman consultant.