Category Archives: Defined benefit

Actuarial solution results in larger opportunities

Milliman was recently retained by a multinational company to provide actuarial services for its retirement programs in six countries. This article by Danny Quant highlights how Milliman’s solution turned the initial valuation contract into broader consulting opportunities.

2017 starts with corporate funded status improvement of $9 billion

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. The year 2017 opened optimistically with the funded status for these pension plans improving by $9 billion due to January’s investment gain of 0.87% as well as a small rise in corporate bond rates used to value pension liabilities. As a result, the funded ratio for these plans climbed 0.5% to 81.6% from 81.1% in December 2016.

January marks the fifth straight month of funded status improvement with discount rates once again returning to 4.0% – albeit barely. And with investment returns coming in above expectations, 2017 seems like it’s off to a positive start for pensions.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.55% by the end of 2017 and 5.15% by the end of 2018) and asset gains (11.2% annual returns), the funded ratio would climb to 92% by the end of 2017 and 105% by the end of 2018. Under a pessimistic forecast (3.45% discount rate at the end of 2017 and 2.85% by the end of 2018 and 3.2% annual returns), the funded ratio would decline to 75% by the end of 2017 and 69% by the end of 2018.

Public pension funding status inches back down in Q4 as asset returns fall short of benchmark

Milliman today released the fourth quarter results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans. By December 31st 2016, the funded ratio of these plans had fallen to 70.1%, down from 71.0% at the end of September. The funded status declined by $54 billion, the result of modest investment returns for the fourth quarter that fell short of their quarterly benchmark.

The robust market performance seen post-election helped moderate the losses suffered in October, with Q4 investment returns of about 0.45% in aggregate for the quarter. If the recent surge in the equity market holds up and interest rates remain stable, the returns in 2017 Q1 should be much more promising.

The Milliman 100 PPFI total pension liability (TPL) increased from $4.620 trillion at the end of Q3 to an estimated $4.659 trillion at the end of Q4. The TPL is expected to grow modestly over time as interest on the TPL and the accrual of new benefits outpaces the benefits paid to retirees.

To view the Milliman 100 Public Pension Funding Index, click here. To receive regular updates of Milliman’s pension funding analysis, email us.

Preparing a pension plan termination

The process of terminating a defined benefit (DB) plan is lengthy, time-consuming, and costly. An actuary, trust custodian, attorney, trustee, and investment advisor can assist with many of the duties. In this DB Digest article, Milliman’s Stephanie Sorenson discusses the multiple tasks that plan administrators must accomplish in preparation for a plan termination.

Here’s an excerpt:

Data
It is important to review and validate the participant data. Quality data is critical to the termination process. Insurer quotes will reflect the accuracy, actual or perceived, of the data provided to them.

Also the Pension Benefit Guaranty Corporation (PBGC) requires that the plan sponsor maintain the participant and plan data for six years after plan termination (the date on which PBGC Form 501 is filed). The data should be gathered during the plan termination process and remain accessible during the six-year period.

Does the data have valid identification numbers for all participants? Does the data contain valid dates of birth, hire, participation, and termination? If not, review employment records and update.

Does the data include addresses for all participants and beneficiaries? Are the addresses valid? Do any participants reside outside the United States? Many notices are required to be sent during the termination process. An address and death search for all inactive participants may be prudent.
Verifying addresses prior to termination can save time and frustration.

Have all of the accrued benefits been calculated and certified? If yes, does the data include the information that was used to calculate the stored accrued benefit? During the termination process, a Notice of Plan Benefits will need to be supplied to all participants. This notice is required to provide the personal data used to calculate the participant’s accrued benefit along with a statement requesting that the participant correct any information they believe to be incorrect. If the plan has frozen accrued benefits but the calculation data is not available, the best available data must be provided to the participant on the Notice of Plan Benefits along with a statement giving the participant the opportunity to provide the missing data.

If benefits are not calculated and certified, does the data contain all of the information necessary to calculate the benefits? Final benefits will need to be calculated, not estimated, for all participants.

Data is fluid and constantly changes. Participants move, die, quit, get married/divorced, and retire during the termination process. Ensuring and maintaining accurate data is key to preparing for a plan termination.

Pension funded status comes almost full circle at 2016 year-end

Wadia_ZorastMilliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In December, the funded status for these pension plans improved by $13 billion due to robust investment returns of 1.17%, and the funded ratio increased from 80.3% to 81.0% to close out the year. Overall, interest rate declines characterized 2016, with the end of August marking the lowest discount rate (at 3.32%) in the PFI’s 16-year history. Since that point and coincident with the conclusion of the U.S. presidential election, interest rates have steadily increased.

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Last year was a rollercoaster of a year, but we’re ending up nearly where we started—with a funded ratio of 81.0%. Going into 2017, rumors of potential multiple interest rate hikes by the Federal Reserve have plan sponsors and pension practitioners closely watching market activity. If interest rates continue to climb, the funded ratio could make some major gains.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.59% by the end of 2017 and 5.19% by the end of 2018) and asset gains (11.2% annual returns), the funded ratio would climb to 93% by the end of 2017 and 106% by the end of 2018. Under a pessimistic forecast (3.39% discount rate at the end of 2017 and 2.79% by the end of 2018 and 3.2% annual returns), the funded ratio would decline to 74% by the end of 2017 and 68% by the end of 2018.

An executive survival guide for tax-exempt employers sentenced to Section 457

Pizzano-DominickThis blog is part of a 12-part series entitled “The nonqualified deferred compensation plan (NDCP) dirty dozen: An administrative guide to avoiding 12 traps.” To read the introduction to the series, click here.

By the time executives of the corporate world-at-large experienced the first full-fledged legislative lockdown of their nonqualified deferred compensations, when the American Jobs Creation Act of 2004 instituted Internal Revenue Code (IRC) Section 409A, most of their counterparts in the tax-exempt sector had already been long used to having such benefits confined. Many years earlier, the Tax Reform Act of 1986 (TRA 86) sentenced these benefits to the custody of IRC Section 457, generally effective for taxable years beginning after December 31, 1986. The problem is that even as we approach the 30th anniversary of this sentence, Section 457 applicability and compliance still remain sources of confusion and frustration for many not-for-profit employers as they seek to provide significant executive compensation programs.

Tax-exempt employers, not employees
When not-for-profit organizations hire key decision-makers from the “for-profit” world, these organizations frequently find individuals desiring deferred compensation benefits similar to those offered by their former employers. Unfortunately, too often the tax-exempt organization complies and implements a plan that, while perfectly in compliance with the tax laws governing similar plans sponsored by corporations in the for-profit sector, does not comply with the more restrictive limitations applicable to most not-for-profit entities. If the Internal Revenue Service (IRS) discovers such a plan during an audit of the individual or the organization, the employer’s good intentions could result in extremely adverse tax consequences for the executive.

The deliberations that led to the 457 sentence
Why are tax-exempt employers subject to stricter limits than their for-profit counterparts? Because the IRS gives these organizations a pass come tax time, they cannot afford to offer the same charity to their employees. The IRS does not mind if executives of taxable entities defer as much as 100% of their compensation because, while the opportunity to tax this pay is generally deferred until the funds are distributed, the plan sponsor’s ability to take a tax deduction on such amounts is similarly delayed, thereby creating a vital trade-off that enables the U.S. Department of the Treasury to view these arrangements as tax-neutral. In contrast, tax-exempt employers have no tax deductions that can be deferred and thus no trade-off to offset the Treasury’s loss of current tax revenue incurred by their employees’ deferrals of compensation. Because tax-exempt entities as non-taxpayers are not concerned with deductibility of compensation, unless it involves unrelated trade or business income, there would be no incentive for them to limit their employees’ deferrals on their own if Section 457 did not exist.

Applicability of Section 457: Not all tax-exempts are treated equally

Free from Section 457: No separation of Church and the Feds: Originally sentenced to Section 457 by TRA 86 with the other tax-exempts, NDCPs maintained by churches and qualified church-controlled organizations (QCCOs) were paroled in 1988, when the Technical and Miscellaneous Revenue Act exempted this congregation of plans from the application of Section 457 (however, a nursing home or hospital that is associated with a church, but which is not itself a church or a QCCO, would be covered by Section 457 if it is a tax-exempt entity). The only other NDCPs granted Section 457 immunity are those established by the federal government or any agency or instrumentality thereof; although this should not be too surprising given that the creation of these rules as well as determining who must comply with them is, after all, a federal function.

Those sentenced to Section 457: The states, cities, towns, and the rest of the tax-exempts: If an employer is an entity that is a state or local government or a tax-exempt entity other than those described in the preceding paragraph, any NDCP it establishes must comply with Section 457. Plans of states and local governments have been subject to Section 457 from its creation in 1978; however, because the rules governing these arrangements are more similar to those covering qualified plans (e.g., all employees—not just executives—participate, and plan assets must be held in a separate trust for the exclusive benefit of participants), the remainder of this blog will focus on the rules applicable to the nongovernmental tax-exempts sentenced to 457.

What are the terms of a Section 457 sentence?
While a 457 sentence is mandatory, in the sense that it is levied based on the employer’s status, tax-exempt employers do have considerable discretion over the manner in which they choose to serve this sentence: a 457(b) plan (aka an eligible 457 plan), a 457(f) plan (aka an ineligible plan), or concurrently using both. The following chart reveals their major differences:

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