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Archive for the ‘Defined benefit’ Category

GASB 67/68: Pension expense, balance sheet items, and projections from valuation date to measurement date

October 21st, 2014 No comments

In 2012, the Governmental Accounting Standards Board (GASB) released new accounting standards for public pension plans and participating employers, GASB Statements No. 67 and 68. This PERiScope article by Jennifer Castelhano and Erik Goodhart examines the impact these new accounting standards have on the pension expense and balance sheets of both pension plans and participating employers. In addition, the article explores roll-forward procedures that can be used to project plan liabilities from the valuation date to the measurement date.

To read Milliman’s PERiScope series on technical and implementation issues surrounding GASB 67 and 68, click here.

Google+ Hangout: Pension Funding Index, October 2014

October 10th, 2014 No comments

The funded status of the 100 largest corporate defined benefit pension plans improved by $26 billion during September as measured by the Milliman 100 Pension Funding Index (PFI).

The deficit dropped from $279 billion to $253 billion in September, primarily due to an increase in the benchmark corporate bond interest rates used to value pension liabilities. The funded status would have improved further were it not for September’s investment losses. As of September 30, the funded ratio grew from 84.1% to 85.2%.

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 $26 billion in September

October 7th, 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 September, these plans experienced a $45 billion decrease in pension liabilities and a $19 billion decrease in asset value, resulting in a $26 billion decrease in the pension funded status deficit.

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We just had our best month of the year, but it wasn’t enough to make the third quarter a positive one for these pensions. After five straight quarters of improving funded status, we’ve had three straight losing quarters this 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 $241 billion (85.9% funded ratio) by the end of 2014 and to $206 billion (88.0% funded ratio) by the end of 2015.

GASB 67/68: Substantively automatic plan provisions

September 25th, 2014 No comments

This PERiScope article authored by Michael Iacoboni discusses “substantively automatic” plan provisions and their inclusion in the determination of a plan’s total pension liability (TPL). For many plans, the concept of “substantively automatic” is critical to the treatment of cost-of-living adjustments (COLAs), which are often granted on a discretionary or ad hoc basis. In Statements 67 and 68, the Governmental Accounting Standards Board (GASB) neither objectively nor specifically defines the term “substantively automatic” and it does not prescribe a one-size-fits-all formula for determining if a plan’s COLA policies fall into this category.

To read Milliman’s PERiScope series on technical and implementation issues surrounding GASB 67 and 68, click here.

PBGC variable rate premium: Should plans make the switch?

September 17th, 2014 No comments

Moliterno-MariaMany pension plan sponsors are facing a decision on the methodology of calculating the premiums payable to the Pension Benefit Guaranty Corporation (PBGC) that may result in significant savings. PBGC premiums are made up of variable rate and flat rate premiums. Variable rate premiums are based on unfunded vested benefits (UVB). In 2014, many plan sponsors are eligible to change the methodology used to calculate their plan’s UVB. The question is: should they make the switch?

The UVB is determined by the amount that the vested liability, called the premium funding target, exceeds the fair market value of plan assets. The required variable rate premium for 2014 is $14 per $1,000 of UVB and is scheduled to increase to $24 in 2015 and $29 in 2016. The PBGC allows plan sponsors to determine UVB for purposes of calculating the variable rate premium by either:

• Using the three spot segment rates for the month preceding the month in which the plan year begins (standard premium funding target)
• Using the 24-month average segment rates as of the plan’s previously elected look-back period (alternative premium funding target)

Many plan sponsors elected for 2009 to switch to using the alternative premium funding target to avoid the volatile and low spot interest rates basis for the standard premium funding target.

Plan sponsors making the switch are locked into it for five years. After five years, the plan sponsor can switch again. If the plan sponsor doesn’t make a switch, they can stay with the current method as long as they like.

Five years later, plan sponsors who elected in 2009 to switch to using the alternative premium funding target are eligible to switch back to using the standard premium funding target. For calendar year plans, plan sponsors would need to do this in time for the PBGC premium due date of October 15, 2014. With the rise in interest rates that occurred during 2013, plan sponsors are asking themselves if they should make the switch during 2014.

To answer this question, consultants can estimate the variable rate premium amounts under both options for both the 2014 and 2015 plans. Does the plan sponsor save over the course of two years by switching methods?

Let’s look at an example for a sample plan with a UVB of $14.90 million under the alternative method and $9.75 million under the standard method for 2014:

For a calendar year plan, rates used for the standard premium funding target in 2014 are generally higher than the rates used for the alternative premium funding target; therefore, in this example, the standard premium funding target results in a lower variable rate premium for the 2014 plan year by $72,000.

Although interest rates for determining the alternative and standard premium funding target for the 2015 plan year are not yet available, if we assume the rates currently in effect stay constant through the end of the year, rates used for the alternative premium funding target are generally higher than the rates used for the standard premium funding target for the 2015 plan year. Assuming these rates are still in effect for the 2015 plan year, most plans will have a smaller premium funding target under the alternative method for 2015, resulting in a lower variable rate premium. In our example, the alternative method election would produce a more favorable result in 2014 by an amount of $33,000.

Therefore switching in 2014 to the standard premium funding target would result in a projected net savings of $39,000 over the two-year period.

Just remember, the standard method uses volatile spot interest rates. If there is another dip in the market, the plans may face higher costs under the standard premium funding target method and won’t be able to switch back to the alternative premium funding target until 2019. However, they will be happy they switched if interest rates rise but that of course is anyone’s guess!

Google+ Hangout: Pension Funding Index, September 2014

September 16th, 2014 No comments

The funded status of the 100 largest corporate defined benefit pension plans deteriorated by $22 billion during August as measured by the Milliman 100 Pension Funding Index (PFI). The deficit increased from $259 billion to $281 billion at the end of July, which was due to a drop in the benchmark corporate bond interest rates used to value pension liabilities. August’s robust investment gain was not enough to improve the Milliman 100 PFI’s funded status. As of August 31, the funded ratio dropped down from 84.8% to 84.0%.

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

Retirement plan leakage and retirement readiness

September 10th, 2014 No comments

Tedesco-KaraThe title alone proves opposites don’t always attract. “Leakage” means outflow and outflows in retirement plans are not easily controlled. Worse yet, the impact on a participant’s retirement readiness is a big problem. Where money goes once it leaves a retirement plan is a question with many answers, some of which lead to plan sponsors feeling concerned about plan design and the choices available to participants.

In defined contribution (DC) plans such as the 401(k), participants defer money from their paychecks into the plan. The employer may make matching or other employer contributions. Most 401(k) plans are designed to allow participants to access these deferrals, as well as their other vested monies, while actively working. This access occurs through loans, hardship withdrawals, and other in-service distributions. When participants take a loan, they pay themselves back over time. In some instances, however, a participant defaults on the loan, which automatically reduces the account balance. In the case of in-service distributions, once the money is paid to the participant, it does not come back into the plan, similarly reducing the participant account balance.

Of greater concern may be the preretirement withdrawal of an account balance upon termination of employment. Participants terminate employment for a myriad of reasons, such as to start a new career path. In a defined benefit (DB) plan, it is not uncommon to see a lump-sum window option offered to participants. Plan sponsors benefit from participants choosing the lump-sum window option just as they do when terminated participants take their money from 401(k) plans. The plan sponsor’s administrative costs associated with either type of plan are reduced.

The problem? Participant account balances that are cashed out and not rolled over to an IRA or another qualified retirement plan are subject to immediate income tax and potentially burdensome tax penalties, depending upon their age. But many participants don’t know what to do with the money and will often use it right away to satisfy an immediate financial need rather than save it for retirement. An even greater, more glaring problem is that the participant’s total projected retirement savings has been compromised. Does this mean that a participant will not achieve the suggested 70% to 80% income replacement rate? Most likely, the answer is yes, especially if the participant has no other savings outside the former retirement plan.

There is no clear answer to the leakage problem in plans. A good retirement plan design can greatly influence the behavior of its participants. It has to include and encourage regular employer and employee contributions to help build retirement accounts. Withdrawal provisions and loans in plans don’t signify poor plan design, but tighter administrative controls around the plan provisions, such as allowing only one in-service withdrawal per year, helps keep money in the plan. In addition, increased participant education has to remain a focus for employers, with a special emphasis on the benefits of taking a rollover instead of a lump-sum cash distribution.

Corporate pension funded status drops by $22 billion in August

September 8th, 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 August, these plans experienced a $46 billion increase in pension liabilities and a $24 billion increase in asset value, resulting in a $22 billion increase in the pension funded status deficit.

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It was a strong month of asset improvement, but there’s no counteracting record-low interest rates. Year to date, rates have swollen pension liabilities by $165 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 3.89% were maintained, funded status would improve, with the funded status deficit shrinking to $265 billion (84.9% funded ratio) by the end of 2014 and to $228 billion (87.1% funded ratio) by the end of 2015.

GASB 67/68: Calculation specifics on individual entry age normal and recognition of deferred inflows/outflows

September 3rd, 2014 No comments

New accounting rules for public pension plans in the United States are set to take effect beginning in 2014. This PERiScope article in the Governmental Accounting Standards Board (GASB) Statements No. 67 and 68 miniseries discusses the individual entry age (IEA) actuarial cost method.

The IEA cost method is specifically identified in the new standards as the only appropriate method for determining a plan’s total pension liability (TPL), which is the portion of the present value of benefits attributable to past service. This article also discusses the calculation of the amortization period to be utilized in recognizing gains or losses that are due to demographic experience or actuarial assumption changes in the annual expense under GASB 68.

HATFA-14 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 Pension Benefit Guaranty Corporation (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-14 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-14 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-14 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 and use credit balances to optimize the plan sponsor’s use of cash.

Some plan sponsors may decide forgo the opportunities provided by HATFA-14. 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-14 relief for 2013 and satisfy 2013 plan year minimum funding requirements by making contributions based on the 2013 actuarial valuation results prepared under the Moving Ahead for Progress in the 21st Century Act (MAP-21) rates.

Cash savings opportunities under HATFA-14 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.