The June issue of Milliman’s DB Digest summarizes the benefit statement requirements of the Pension Protection Act (PPA) that are related to defined benefit (DB) plans and explores some considerations to help individuals determine the best alternatives for both plan sponsors and plan participants.
Read this month’s DB Digest here and share it with your colleagues.
The Governmental Accounting Standards Board (GASB) yesterday announced they have approve two new standards that will substantially improve the accounting and financial reporting of public employee pensions by state and local governments. The press release is available here. Here is an excerpt from the release:
“The new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations,” said GASB Chairman Robert H. Attmore. “Among other improvements, net pension liabilities will be reported on the balance sheet, providing citizens and other users of these financial reports with a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered.”
More key retirement-related regulatory news for plan sponsors to monitor, including links to detailed information.
IRS issues proposed regulations under the anti-cutback rules of Section 411(d)(6)
The Internal Revenue Service has issued proposed regulations that would provide guidance under the anti-cutback rules of Section 411(d)(6) of the Internal Revenue Code, which generally prohibit plan amendments eliminating or reducing accrued benefits, early retirement benefits, retirement-type subsidies, and optional forms of benefit under qualified retirement plans. These proposed regulations would provide an additional limited exception to the anti-cutback rules to permit a plan sponsor that is a debtor in a bankruptcy proceeding to amend its single-employer defined benefit (DB) plan to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments) under the plan if certain specified conditions are satisfied.
Longevity poses a challenge for retirees with defined contribution plans, because there is always risk of someone outliving his or her savings. A new application for defined benefit plans as a supplement to defined contribution plans may help provide longevity protection.
In his new article on MoneyManagementIntelligence.com, Zorast Wadia outlines this approach, known as a “longevity plan.” Here’s an excerpt explaining how such a retirement model would work:
“In order for the longevity plan concept to succeed, it will need to provide annuity protection to plan participants, be relatively easy to understand and administer and be affordable to plan sponsors. To accomplish the goals of longevity protection and cost reduction, some changes will be necessary to current pension laws including allowing employers to limit plan participation to later ages (e.g. age 45 and beyond) and defer benefit commencement to later ages (e.g. age 75 and beyond). To allow for ease of administration while still offering longevity protection, forms of payment would need to be limited to life and joint and survivor annuity options. The longevity plan would also eliminate investment risk since annuitants would receive guaranteed employer-funded benefits from the longevity DB plan. With the longevity DB plan in place, participants would be free to adjust their investment strategy with respect to benefits accruing from their DC plans. Participants with a higher risk tolerance could invest more aggressively with respect to their individual savings accounts.”
Previous Milliman Insight articles have also assessed longevity plans. “Saving for retirement: What can employers do?” discusses how a “layered longevity plan can potentially ensure that people do not outlive their retirement balances for an uncertain duration.”
For more perspectives on longevity risk and retirement planning read our four-part retirement landscape series, where our team of Milliman consultants accesses the array of risks facing retirees and plan sponsors, and provides feasible solutions to them.
News and views centered on defined benefit (DB) plans were the focus of our latest Retirement Town Hall discussions. If you weren’t able to read our posts as they were published, don’t fret, we have you covered.
Pension gains evaporate in May
June’s Pension Funding Index was released earlier this month, revealing that a $30 billion decline in assets and a $60 billion increase in liabilities in May combined to erase year-to-date gains in the pension funded status of the nation’s largest 100 defined benefit plans. Read the complete roundup of June’s pension funding index.
Milliman’s John Ehrhardt spoke to the Wall Street Journal and offered his perspective on GM’s decision to lock in high pension obligations. The company will make a lump sum payment option available to about 42,000 salaried retirees and enroll the remainder of salaried retirees into a group annuity purchased from Prudential Insurance Co.
Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest defined benefit pension plans. In May, these pensions experienced a $90 billion decrease in pension funded status based on a $60 billion increase in the pension benefit obligation (PBO) and a $30 billion decline in asset value. The $90 billion decrease in funded status pairs with last month’s $39 billion decrease, depriving these pensions of all year-to-date gains.
The promising start to 2012 has been undercut by the same factors that have plagued these pensions for several years now: Plummeting discount rates and volatile asset returns. It’s worth noting, however, that it could have been worse. Our year-end Pension Funding Study showed an unprecedented move toward fixed income, and that movement helped counteract the worst single-month equity market we’ve seen since last September. May’s $30 billion decrease in asset value would have totaled $49 billion had these pensions been using the typical 60% stocks/40% fixed income approach that had been the status quo until last year.
In May, the discount rate used to calculate pension liabilities fell from 4.76% to 4.56%, pushing the PBO up to $1.621 trillion at the end of the month. The overall asset value for these 100 pensions decreased from $1.294 trillion to $1.264 trillion.
Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.56% were to be maintained throughout 2012 and 2013, these pensions would improve the pension funded ratio from 78.0% to 80.2% by the end of 2012 and to 84.9% by the end of 2013.
John Ehrhardt, an actuary at consulting firm Milliman, said GM is making this move at arguably one of the worst possible times. That’s because it is basically locking in pension obligations at discount rates that are near historical lows.
Discount rates, which are calculated based on corporate bond rates, are used to determine the present value of future liabilities. Lower rates mean higher obligations, and GM has seen its discount rate fall to 4.15% at the end of 2011 from 4.96% a year earlier.
“They’re paying a price for risk management by locking in liabilities at the highest values in history,” Ehrhardt said.
More key retirement-related regulatory news for plan sponsors to monitor carefully, including links to get detailed information.
IRS provides more guidance on health flexible spending account reform
The Internal Revenue Service (IRS) has issued Notice 2012-40 providing guidance on the effective date of the $2,500 limit, as indexed for inflation, on salary reduction contributions to health flexible spending arrangements (health FSAs) under Section 125(i) of the Internal Revenue Code (the $2,500 limit) and on the deadline for amending plans to comply with that limit.
This notice also provides relief for certain contributions that mistakenly exceed the $2,500 limit and that are corrected in a timely manner. Finally, the notice requests comments on whether to modify the use-or-lose rule that is currently set forth in the proposed regulations with respect to health FSAs.
Notice 2012-40 will be in Internal Revenue Bulletin 2012-25, dated June 18, 2012. Download a copy of Notice 2012-40 at IRS.gov.
DOL issued three advisory opinions
The Department of Labor (DOL) released three new advisory opinions:
2012-02A – 403(b) Plan Safe Harbor
The letter found that a tax-sheltered annuity plan under tax code Section 403(b) does not lose its safe harbor status under ERISA if the plan sponsor maintains a separate qualified tax code Section 401(a) plan.
2012-03A – Abandoned Plans
The letter found that, based on the facts and materials submitted, a retirement plan proposed by National Retirement Plan, Inc. is not an employee benefit pension plan as defined under ERISA Section 3(2).
2012-04A – Multiple Employer Plans
This regards whether a retirement savings program marketed by 401(k) Advantage LLC (Advantage) as a multiple-employer plan would be a single “employee benefit plan” within the meaning of ERISA section 3(2).
The letter found that the 401(k) plan maintained for employees of a limited-purpose corporation designed to operate the plan and for the employees of unrelated employers is not a single multiple-employer plan.
GAO finds more mental health and substance abuse exclusions in employers’ health plans
In a new report, the Government Accountability Office (GAO) found more mental health and substance abuse exclusions in employers’ 2010 and 2011 health plans in comparison to their 2008 plan years.
However, given the low overall response rate of 24% from surveyed employers, GAO Director John Dicken wrote “…Our survey results are not generalizable,” in a letter to Rep. George Miller, ranking member of the House Education and the Workforce Committee.
A summary and copy of the full report can be read here.
Steve Melek’s Behavioral Health Advisor series includes insight into a wide variety of mental health parity issues. His examination of mental health parity and quantitative treatment limits can be read here.
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