From far away, we conjectured that the headline-grabbing stories about companies moving to “mark to market” pension accounting that occurred in the past 18 months were woefully incomplete in key details. At that time, the stories talked about changes companies made to their Financial Accounting Standards Board (FASB) financial reporting under Accounting Standards Codification (ASC) Topic 715. These changes, for the most part, meant that the annual gains and losses that plans experienced because of interest rate declines and poor equity returns would hit earnings immediately rather than be deferred. This was resulting in some pretty big numbers. Part of our conjecture was that these companies were first-movers in adopting what some believed were going to be mandates once international accounting standards became the rule.
Furthermore, our numero uno on the conjecture list of why they were doing this was that they would implement an investment approach based on liability-driven investing (LDI) to protect against those nasty interest rate and market declines, with their resulting losses. When we saw repeat headlines about some of those same companies again taking massive hits to earnings because of their pension accounting, I was dumbfounded. I hate being wrong but admit I was.
We’ve talked a lot recently about the record contributions facing corporate pension plan sponsors. Announcements by several large companies offer further perspective. Here is an excerpt from a Bloomberg article:
General Electric Co. (GE), Boeing Co. (BA) and 3M Co. (MMM) will join big U.S. employers in making a record $100 billion in 2012 pension contributions, 67 percent more than two years ago, as low interest rates boost companies’ liabilities.
Payments may total $400 billion from 2011 through 2015 to ease underfunding at the 100 largest defined-benefit programs, according to consultant Milliman Inc., which estimated that assets in January were enough to cover less than three-fourths of projected payouts…
Companies from defense contractor Lockheed Martin Corp. (LMT) to aviation-electronics maker Honeywell International Inc. are caught in a vise: the Federal Reserve Board’s vow to keep rates at current levels until 2014 means pension plans’ fixed-income investments are stagnating just as new rules shorten the time available to shore up funding.
“They’re going to have to kick money in,” said John Ehrhardt, a consulting actuary at Seattle-based Milliman. “We’re basically seeing historically low interest rates driving historically high employer contribution requirements.”
If you’ve been too busy this month planning some special event for your sweetheart for Valentine’s Day (or a party for that big Abe Lincoln/George Washington fan in your life) here’s what you’ve missed on Retirement Town Hall.
An early start
When’s the best time to start on your nest egg? As soon as you’re out of the nest. That’s why we highlighted the keys to Retirement planning for Millennials in a recent post. We began wondering if those in the retirement benefits world practiced what we preached. So we followed the Millennials post with a poll question asking you about Getting started in your own retirement planning.
Recently we asked readers to tell us how long they would be Delaying gratification before starting to claim Social Security. Speaking of waiting it out, Zorast Wadia noted that the wait was over for pension contributions to start reaching record levels and why he is Looking ahead to $90+ billion in contributions.
Better late than never
Of course the big news of the month so far has been John Ehrhardt’s report that Pension plans begin 2012 by narrowing a record deficit. Ehrhardt stayed busy and participated in a Pension funding discussion on CNBC.
Right on time
Is now the time to move to liability-driven investing (LDI)? A lot of people think so. Do they know what to expect in the process? Not always. That’s why Will Clark-Shim recounted his experience with the twists and turns of Liability-driven investing: Putting it into practice followed by his Two longs make it right? post.
Finally, we always keep you up to speed on the latest in notices and requirements in the retirement benefits world as they happen. Here are some key announcements to consider from the past few weeks:
To stay up to speed on other important dates on the benefits practitioner’s calendar, be sure to follow us on Twitter @millimaneb.
IRS’s Revenue Ruling 2012-4 provides retirement plan sponsors guidance that permits their qualified defined benefit (DB) plans the ability to accept a direct rollover from their qualified defined contribution (DC) plans, allowing participants to purchase an annuity that is incremental to the amount the DB plan would ordinarily provide. The ruling, which only applies to an employer that sponsors both a DB and a DC plan, is effective for rollovers beginning on or after January 1, 2013, but may be relied upon for rollovers made before that date. The DB plan will need to be amended to permit such direct rollovers if it does not currently do so.
The new guidance uses an example to illustrate the conditions that a plan must satisfy, including the following:
- The annuity payable from the DB plan must be converted on an actuarially equivalent basis from the amount rolled over from the DC plan using the applicable interest rate and applicable mortality table prescribed in Internal Revenue Code section 417(e)
- If the assumptions used are more favorable in the conversion (i.e., a higher interest rate or a mortality table with shorter life expectancies), the “excess” portion of the annuity will be subject to the nonforfeitable rules applicable to benefits derived from employer contributions and must be taken into account under the (section 415) annual benefit limits
- If the assumptions used are less favorable in the conversion (i.e., a lower interest rate or a mortality table with longer life expectancies), the DB plan will fail to satisfy the nonforfeitable rules (under section 411(a)(1)) applicable to accrued benefits
- The DB plan annuity, increased by the rollover conversion, must commence within a period of not more than 180 days after the date of the rollover election, and interest must be credited at 120% of the federal midterm rate (under section 1274) for the period between the rollover date and the annuity starting date
At present, it is unclear how many plan sponsors will actually adopt such rollover provisions.
Claiming Social Security as soon as you’re eligible might be the fastest track to a regular check in your early 60s, but the payouts are reduced if you begin earlier than your full retirement age. What’s more, benefits further increase for each year you delay claiming until you reach 70, so delaying claiming can lead to a bigger check down the road. We want to know how this is affecting your plans.
We have prepared a comparison of 2012 features and contribution limits for 401(k), 403(b), and 457(b) plans. It is available here.