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Posts Tagged ‘defined benefit’

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.

Top 10 worldwide Milliman publications of 2014

January 5th, 2015 No comments

In 2014, Milliman published a range of articles and videos, covering issues including retirement ideas for Millennials, the pros and cons of catastrophe models, the value of enterprise risk management (ERM) programs, and the impact of the Patient Protection and Affordable Care Act (ACA) on financial statements. We also published on challenges related to healthcare costs and insurance and risk management issues—and about real insurance for fantasy football and insurance for ride sharing. To view this year’s 10 most viewed articles and reports, click here.

Revised mortality assumptions issued for pension plans

November 6th, 2014 No comments

The Society of Actuaries (SOA) issued two final reports that update the mortality assumptions that private defined benefit retirement plans in the United States use in the actuarial valuations that determine a plan sponsor’s pension obligations. Affected pension plan sponsors should expect the value of the actuarial obligations to increase, but the rate of increase will depend on the specific demographic characteristics of the plan participants and the types of benefits provided.

The RP-2014 Mortality Tables Report (RP-2014) replaces the RP-2000 Mortality Tables Report (RP-2000), using the incidence of deaths in private plans over the 2004 through 2008 period. The SOA’s companion Mortality Improvement Scale MP-2014 Report (MP-2014) adds a second, complex variable to the RP-2014 tables for “future mortality improvements.” “Improvement” refers to the concept that mortality rates have generally decreased from year to year and this pattern is expected to continue in the future. The new MP-2014 improvement scale varies by both age and year. The SOA concluded that its best estimate for long-term mortality improvement in the United States is an ultimate annual rate of 1% through age 85 and slowly diminishing for higher ages.

The SOA committee that developed the tables recommends consideration of their use, effective immediately, for measuring private pension plan obligations. Their use also will affect the measurement of plan obligations associated with private employer postretirement health and life insurance plans.

Implications of the SOA’s reports include:

• The calculations to comply with the accounting standards for retirement plans (Financial Accounting Standards Board Topic 715) may be affected as early as for fiscal year-end 2014.
• Calculations to comply with single-employer pension plan funding rules of the Internal Revenue Service (IRS) under the 2006 Pension Protection Act will not be affected until the U.S. Department of Treasury formally adopts—possibly not until 2017—a replacement for the current statutory tables (based on the RP-2000 Mortality Table). Minimum required cash contributions and, where applicable, lump-sum payments, will likely increase when the Treasury adopts a replacement mortality table.
• Although the SOA’s analysis acknowledged statistically significant structural differences in the underlying mortality rates produced for public and private plans, and therefore eliminated from the final RP-2014 report the data from “three extremely large public plans,” the SOA still states that “it would not necessarily be inappropriate or inconsistent for actuaries to consider…the RP-2014 tables as suitable mortality benchmarks for a specific public plan.”
• Public and multiemployer pension plans are not required to adopt these new tables. However, as these plans’ actuaries review the mortality assumption they currently use, they may find that information presented in the new tables may influence the plans’ assumptions as RP-2014 and MP-2014 become widely accepted. If the plans’ mortality assumptions are reviewed on a regular basis, the timing of the next review is not likely to be affected.

Actuarial calculations using the two-variable approach embodied in the RP-2014 and MP-2014 tables will be more complex when compared to current typical calculations using the RP-2000 table. And although pension obligations could increase, the effects will differ. For example, the obligations associated with a cash balance plan will likely only modestly change, while certain postretirement health insurance obligations may be the most dramatically affected.

Please contact your Milliman consultant for more details on how your defined benefit pension plan will be affected by the SOA’s new mortality table and mortality improvement scale.

Year-end compliance issues for single-employer retirement plans

November 5th, 2014 No comments

By year-end 2014, sponsors of calendar-year single-employer retirement plans must act on necessary and discretionary amendments and perform a range of administrative procedures to ensure compliance with statutory and regulatory requirements. This Client Action Bulletin looks at key areas that such employers and sponsors of defined benefit (DB) or defined contribution (DC) plans should address by December 31, 2014.

Multiemployer pension plans performed well in 2013 but many remain stuck in the mud

October 10th, 2014 No comments

Campe-KevinMilliman today released the results of its inaugural Multiemployer Pension Funding Study (MPFS), which analyzes the cumulative funded status of all U.S. multiemployer pension plans. In 2013, these pensions were buoyed by strong investment performance—a $45 billion reduction in the funding deficit, which represents a 9% improvement in funded status.

mpfs-fig1

On an aggregate basis, 2013’s strong market performance helped these plans return to funding levels similar to what they saw ahead of the global financial crisis. For plans in need of financial recovery, achieving full funded status will require returns in excess of assumed rates of return. More than half of all plans will need to earn an average of 8% or more per year over the next 10 years to reach 100% funding.

Not all of these multiemployer plans are suffering the same degree of underfunding. Our analysis found that 22% of these plans are better than 100% funded at the end of 2013. At the other end of the spectrum, 15% of these plans are less than 65% funded.

Plan maturity is a major contributor to these plans’ ability to respond to poor funded status, and the level of maturity can be measured by the ratio of active-to-total participants. Between 2002 and 2012, the overall percentage of active participants in these plans fell from 48% to 37%.

To download a copy of the entire study, click here.

HATFA requires immediate action on 2013 defined benefit plan valuations

August 6th, 2014 No comments

President Obama is expected to sign into law the recently passed Highway and Transportation Funding Act (HATFA). As enacted, single-employer and multiemployer defined benefit pension plan sponsors will see temporary reductions in minimum required contributions and may be able to avoid benefit restrictions. Because the new law as written applies retroactively to the 2013 plan year (absent an election to opt out), affected plan sponsors will have to make decisions soon, ideally equipped with yet-to-be published technical guidance from the Internal Revenue Service (IRS).

At a minimum, plan sponsors will need to quickly instruct their plan actuaries to redo the 2013 actuarial valuation calculations or formally elect to opt out.

In general, the new law modifies the 2012 Moving Ahead for Progress in the 21st Century (MAP-21) Act interest-rate corridors used by affected sponsors to determine their minimum funding liabilities. HATFA maintains a narrower corridor than MAP-21 for the 2013 to 2017 plan years and then phases in a wider corridor over four years beginning in 2018. A plan sponsor may elect, in writing, to retain its use of the MAP-21 interest-rate corridor only for the 2013 plan year; starting in 2014, use of the HATFA corridors by all plan sponsors is required.

Plan sponsors face a number of time-sensitive decisions and actions as a result of HATFA’s enactment. For example, absent an election to opt out, the narrower 2013 plan year interest-rate corridor will require a revised actuarial valuation. Plan sponsors will also have to revise their disclosures to reflect the HATFA changes in the next annual funding notices. As the HATFA change temporarily reduces the amount a sponsor must contribute and the tax deductions for those contributions, the employers’ taxable income could increase. And longer term, required pension plan contributions should increase after the temporary “smoothing” provision expires, depending on corporate bond interest rates and other factors at that time.

The HATFA provision does not affect multiemployer defined benefit pension plans nor Pension Benefit Guaranty Corporation (PBGC) premiums. The pension-related provisions in HATFA also include changes for certain plan sponsors in bankruptcy, and companies subject to the rules of the Cost Accounting Standards Board (CASB) will have to adjust their CASB recovery calculations. Cooperative/small employer charity plans will need to recalculate their plans’ full funding limits.

For additional information about HATFA’s pension provisions and assistance with exploring the short- and long-term pension funding options, please contact your Milliman consultant.

Why DB plans should still be relevant

July 18th, 2014 No comments

Hart-KevinFor well over a decade now, defined contribution (DC) plans have been all the rage. Most new retirement plans are DC plans, a lot of which are 401(k) plans. And some defined benefit (DB) plans that do exist are being frozen or terminated and replaced with new or enhanced DC plans. Throughout these changes in retirement plan types, a common question is arising: Is there any room in the retirement benefit world for DB plans?

The answer should be a resounding “Yes.” DB plans should continue to remain relevant because they provide benefit features that can’t be offered in DC plans. This doesn’t mean that DB plans make sense for every employer, but they should make sense for certain employers.

Let’s start with the most obvious difference between DB plans and DC plans. Under a DB plan, employees generally do not bear the investment return risk. Certain employers could see this as a benefit. By offering their employees a DB plan, employers are providing a “guaranteed” benefit that is generally defined by a specific formula. Employees could see this as a much more attractive option than a DC plan.

Some employers may be looking to provide significant retirement benefits. It is possible to allow employees to earn a retirement benefit of up to 100% of their compensation in a qualified DB plan. This level of retirement benefit is not generally available under a qualified DC plan, which is due to the limits on annual employer contributions.

DB plans can be used by employers to better manage their employee workforce. They can be used to either encourage early retirements or incentivize longer tenures, whereas DC plans cannot do either. DB plans can have early retirement eligibility provisions that provide for subsidized early retirement benefits. A typical early retirement provision would allow for subsidized early retirement benefits to be available at age 55 (provided enough years of service have been earned). This allows employees to receive retirement benefits beginning at age 55 and provides an incentive for employers that want a certain portion of their workforces to begin terminating and retiring prior to age 60. In addition, DB plans have the opportunity to offer voluntary staff reduction programs. Employees can be encouraged to retire earlier than they were possibly considering through an early retirement incentive program. DB plans usually provide more valuable benefits for employees that have a longer tenure with their employers. So providing a DB plan incentivizes employees to stay with their employers for a longer period because of the typical benefit structure in DB plans. And employees that are planning on staying with their employers for a long period may seek out an employer that offers a DB plan.

A DB plan may not be the best choice for every employer. However, DB plans should still remain relevant because they can provide features and benefits that cannot be provided by DC plans.

Boosting retirement confidence

June 4th, 2014 No comments

Bleick-TimThe Employee Benefits Research Institute (EBRI) recently issued its 2014 Retirement Confidence Survey. The percentage of American workers who say they are not too confident or not at all confident they will have enough money to live comfortably throughout their retirement years now stands at 43%, down from 49% a year ago. While this is trending in the right direction, it is still concerning that more than four out of every 10 American workers currently put their chances of a comfortable retirement at less than 50-50.

The survey does a good job of dissecting the results to explore correlations. For example, the retirement confidence levels are vastly different between workers who have a retirement plan—e.g., an IRA, a defined contribution (DC) plan, or a defined benefit (DB) plan—compared to those who do not. Of those who have a retirement plan, only 28% say they are not too confident or not at all confident about a comfortable retirement. Of those who do not have a retirement plan, 69% are not too confident or not at all confident. It’s likely that many of these workers have very little personal savings. Add to that everyone’s concern about the path that Social Security is currently on, and it’s no wonder that almost seven out of 10 American workers with no retirement plan take a dim view of their chances for a comfortable retirement.

There’s an obvious solution to increasing retirement confidence in America, which is to get more workers into retirement plans. It may well be that a good portion of that 69% has 401(k) or similar retirement savings vehicles available at their employers, but they are not utilizing them. To get more workers into these plans, employers need to be continuously encouraging their employees and educating them on the power of “starting early,” the benefits of tax-deferred growth, and how they are leaving money on the table if there’s a match. Plus, automatic enrollment is an excellent mechanism to get new employees contributing at the onset. Small employers who do not currently offer a retirement savings vehicle should consider that retirement plans can help attract and retain employees and instill the importance of saving for retirement.

One of the most common 401(k) designs is one in which the employer matches 50 cents of every dollar an employee contributes, up to 6% of pay. Translation: employee contributes 6% of his pay and employer kicks in another 3% of pay, for a total of 9%. A person age 35 making $50,000 doing this every year for 30 years would have about $500,000 at age 65 (assuming 3% pay increases and 6% return on investments). Do you think half a million dollars would boost someone’s retirement confidence level?

What should pension sponsors include in their benefit statements?

April 9th, 2014 No comments

Pension sponsors await model benefit statements from the Department of Labor (DOL) as required by the Pension Protection Act (PPA). Until guidance is issued, sponsors are to comply with new disclosure requirements in good faith. In the latest issue of DB Digest, David Benbow explains what sponsors should include in their benefit statements pending DOL guidance:

Be sure your statements contain the following required items:

• Accrued benefit
• Vested benefit, or the date the participant is expected to become vested
• A description of permitted disparity or a floor-offset arrangement if they are used in your plan

Make sure your statement is understandable to your average participant. You should check with your legal counsel to ensure that you’re in good faith compliance with the interim guidance regarding your delivery method and frequency.

Issuing benefit statements provides sponsors the opportunity to communicate a plan’s value to participants. Milliman’s Lily Taino offers more perspective in her article “Defined benefit plan statements: Getting by or adding value?

The tontine pension plan: A defined benefit panacea?

March 14th, 2014 No comments

Bradley_JeffConsider a retirement plan with the following characteristics:

• The plan provides an adequate stream of lifetime payments to plan participants
• Plan sponsors have a fixed contribution to the plan (just like a defined contribution plan)
• Plan sponsors have no investment, longevity, or other actuarial risks
• The plan is always fully funded

Sounds too good to be true doesn’t it? It turns out that the tontine pension plan has all of these characteristics. This paper by Jonathan Barry Forman and Michael J. Sabin discusses the inner workings of such a plan and how the above four characteristics come to fruition. The paper goes on to suggest that the tontine pension plan can solve the public sector pension underfunding crisis.

Never heard of a tontine? Then you are not alone. Simply put, a tontine is a financial arrangement where each member (usually the same age) contributes an equal amount. The total is awarded entirely to the sole survivor. Tontines were actually quite popular prior to the 19th century. In the early 1900s, however, the state of New York passed legislation that all but outlawed tontines, and other states followed.

While the paper doesn’t suggest that we lobby to resurrect pure tontines as financial instruments, it does suggest that we use the tontine concept to create a type of pension plan—the tontine pension plan.

The concept is simple. An employer contributes a fixed amount per year to an employee’s account; this account, managed by the employer, accumulates to a fund which, upon retirement, is converted to an annuity benefit payable to the employee. When the employee dies, the remainder of his or her “fund” or “reserve” is then redistributed to the remaining retirees. Actuarial principles ensure that amounts annuitized and subsequently redistributed upon death are done in a fair and equitable manner. Age is used to compute life expectancies, probabilities of death, and the associated fair transfer values.

Participant accounts are adjusted upward or downward based on the trust’s investment earnings. Adjustments are also made to the accounts for mortality gains and losses. Thus, the participants bear all of the investment risk as well as the longevity and other actuarial risks. All the plan sponsor has to do is contribute the fixed amount per annum.

While there are certain issues that would need to be worked out for the tontine pension plans to work in an ERISA environment—mandatory qualified joint and survivor annuity (QJSA), qualified optional survivor annuity (QOSA), or qualified preretirement survivor annuity (QPSA) benefits, for example—most of these issues generally do not exist in public sector plans.

Can such a plan solve the public sector pension funding crisis? Not by itself. In order to accomplish that objective, existing underfunded levels would need to be shored up through increased contributions, investment earnings, and/or cuts to benefits. However, once the underfunding is shored up, the tontine pension plan would prevent such deficits from happening in the future. Going forward, the tontine pension plan may be just what the doctor ordered.