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Posts Tagged ‘defined benefit’

Plan funding side by side: Traditional DB and VAPP

April 16th, 2015 No comments

Coffing-KellyIn recent months, we have featured quite a few articles on the resurgence in popularity of variable annuity pension plans (VAPPs). They provide lifelong inflation-protected benefits to participants while employers make predictable plan contributions (similar to 401(k) plans).

In this presentation, I discuss how funding a VAPP compares with funding a traditional defined benefit pension plan. The presentation also touches on how Milliman helps plan sponsors stabilize benefits for retirees through reserves.

For more information on VAPPs, click here, or visit our reading list.

Communication is key to achieving high take-up rates for pension lump-sum cash out programs

April 7th, 2015 No comments

Bentz-JulieOne of the ways many organizations are reducing pension risk is by offering a lump-sum cash out opportunity, or “window,” to former employees. Successful cash outs can reduce participant-driven fees and future plan liabilities, as well as protect plan sponsors from unexpected plan costs. But without a high response rate, cash outs won’t deliver the desired results. That’s where communication comes in: successfully notifying and educating participants of their cash out options is key to achieving the highest possible response rate.

Generally, Milliman has seen that a program with an effective communication campaign can achieve take-up rates in the range of 50% to 60%. Consider these proven steps to communicate your lump-sum cash out option:

1. Plan for success. Determine how to get your communications into their mailboxes, literally. Do you have good addresses? How about email addresses? If not, how can they be found?

2. Make the message clear. Separate information from action to simplify the decision-making process and to ensure that participants aren’t overwhelmed with their options. Highlight what they need to know, what they need to do, and where they can find help along the way. Communication should be carefully presented as unbiased and understandable options.

Our lump-sum communication plan is supported by what the U.S. Government Accountability Office (GAO) reported regarding the eight key types of information participants should have for a sound understanding of a lump-sum offer. Your communication should answer the following questions:

• What benefit options are available?
• How was the lump sum calculated?
• What is the relative value of the lump sum versus the monthly annuity?
• What are the potential positive and negative ramifications of accepting the lump sum?
• What are the tax implications of accepting a lump sum?
• What is the role of the Pension Benefit Guaranty Corporation (PGBC) and what level of protection does the PGBC provide on each benefit option?
• What are the instructions for either accepting or rejecting the lump sum?
• Who can be contacted for more information or assistance?

An appealing design should complement a clear message. Design, layout, graphics, and colors are all factors that can make the difference between something that gets a response and something that gets ignored.

3. Reinforce the message. Don’t expect one mass mailing to do the job. Include multiple touch points to announce the window, educate about the opportunity, and provide reminders about the deadline.

4. Offer support. Be sure to consider where participants can go for help, whether that’s a call center, human resources (HR) department, or outside financial advisors. Then provide the service team with materials such as frequently asked questions (FAQs), communication samples, and training to prepare them to answer questions and support the initiative.

5. Go the extra mile. To boost the response rate, you may also want to consider additional touch points, such as:

• Webinars with overviews of pension benefits, discussions of lump sums versus annuities, and other considerations
• Letters for special situations, such as qualified domestic relations orders (QDROs), alternate payees, etc.
• Individual consultations with experienced retirement education specialists
• Group meetings to walk through the statement, form, and election process
• A website with personalized statements, online election capabilities, and daily reporting of response rates

2014 a so-so year for most multiemployer plans

March 18th, 2015 No comments

Campe-KevinMilliman today released the results of its Spring 2015 Multiemployer Pension Funding Study (MPFS), which analyzes the cumulative funded status of all U.S. multiemployer pension plans. These pension plans experienced little movement last year, slipping slightly from an 81% funded status at the end of 2013 to an 80% funded status at the end of 2014. As was the case in 2013, many mature plans are still struggling to recover from the financial crisis.

mpfs-1

While the market value of assets for all multiemployer plans increased by $7 billion, the liability for accrued benefits outpaced these gains, growing by $12 billion and resulting in an increased shortfall of $5 billion.

People assume that the stock market recovery would be enough to push these multiemployer plans back to where they were in 2007, but it’s not that simple. Liabilities have been growing at 7.5% per year on average, which complicates a full recovery.

Approximately 15% of multiemployer pension plans are less than 65% funded as of December 31, 2014, and over half of the $117 billion aggregate shortfall for all multiemployer plans is attributable to these plans. On the positive side, about 22% of all multiemployer plans are over 100% funded.

The study notes that the recently enacted Multiemployer Pension Reform Act of 2014 provides new tools to the trustees of the most severely underfunded multiemployer plans.

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

UK pension reform offers new opportunity

March 5th, 2015 No comments

People retiring after April 1 in the UK will have the freedom to do whatever they like with the money from their various pension plans. This FT Adviser article by Milliman’s Colette Dunn and Russell Ward offers perspective on the effect reform will have on an individual’s risk and also on the impact on defined contribution pension schemes.

Here is an excerpt:

To reflect changing retirement patterns and provision, DC schemes need to offer flexibility. Individuals want the flexibility to postpone retirement and/or phase pension income, to align with continued participation in work. These are two fundamental ways for individuals to manage the risk that pension income will be less than they require. Flexibility to integrate the Nest pension with other pensions so that the total pension income is level could also be beneficial. Individuals also want to have their money when they need it. In other words, they require flexibility in terms of sequencing. For example, individuals may want a lump sum when they retire to update their house, buy a new car or go on holiday. They may also need an increased income towards the end of their retirement if they need to fund care costs.

It is clear that the next generation of products need to enable ongoing advice. As the circumstances of the retiring individual evolve, their retirement solution must have the ability to adapt, so that they can respond dynamically to changing needs.

Given an individual’s need for certainty in retirement, we expect guarantees to remain in demand for at least part of their solution.

…The new environment provides an opportunity for advisers to help individuals throughout their retirement, and for providers to offer solutions which recognise the changing needs and regulatory environment. This will enable individuals to make better choices which provide improved risk-adjusted returns on their retirement savings and deliver a better overall chance of meeting their goals. The tools and techniques required to deliver these solutions are available now.

Retirement plans: Key dates and deadlines for 2015

February 13th, 2015 No comments

Milliman has published 2015 retirement plan calendars for single-employer defined benefit (DB) plans, multiemployer defined benefit plans, and defined contribution (DC) plans. Each calendar provides key administrative dates and deadlines.

2015 single-employer defined benefit plans calendar
2015 multiemployer defined benefit plans calendar
2015 defined contribution plans calendar

Along with downloading each calendar, be sure to follow us at Twitter.com/millimaneb where we tweet upcoming dates and deadlines for plan sponsors.

VAPPs: Coming soon to a retirement plan near you?

February 12th, 2015 No comments

Camp,-GrantAs previously written about on this blog in April 2014 and May 2013, variable annuity pension plans (VAPPs) are regaining interest for retirement plan sponsors because their structure combines many of the strengths of traditional defined benefit plans with the strengths of traditional defined contribution plans.

Defined benefit plan features of VAPPs
As with traditional defined benefit plans, benefits in a VAPP are paid for the lifetime of the participant and beneficiary. While the level of the benefit may not be guaranteed, stabilization strategies exist to dramatically reduce the possibility of retiree benefit declines and the participant does not need to worry about running out of money during retirement. VAPPs pool longevity risk within the plan and have professional asset management like a traditional defined benefit plan, enabling the plan to provide larger average benefits per dollar contributed compared to individually directed defined contribution accounts. These defined benefit plan characteristics are desirable for employers looking to attract and retain top talent.

Defined contribution plan features of VAPPs
As with defined contribution plans, VAPPs have controllable employer costs and no funding surprises. VAPPs maintain their funded status in all market conditions, which eliminates concerns about underfunding. This means that plan sponsors can set a target contribution level such as a fixed dollar amount or fixed percentage of pay, similar to a defined contribution plan. Additionally, participants participate in market upside, providing a portable benefit (meaning that a participant is not harmed by switching jobs mid-career) and expected inflation protection during retirement.

To learn more about VAPPs, visit this reading list.

Variable annuity pension plan reading list

February 9th, 2015 No comments

Variable annuity pension plans (VAPPs) are hybrid retirement plans that provide employers an alternative design to the traditional defined benefit (DB) plan and the defined contribution (DC) plan. VAPPs can stabilize contributions for sponsors while offering participants lifelong income. This reading list highlights various aspects related to VAPPs.

• Milliman Hangout: Variable annuity pension plans (VAPPs)
Milliman consultants Kelly Coffing and Grant Camp talk about the VAPP’s features in this video. They also discuss the value VAPPs offer sponsors and participants.

“Making the case for variable annuity pension plans (VAPPs)”
VAPP retirement benefits increase or decrease depending on whether a plan’s investments return more or less than the established “hurdle rate.” A benefit stabilization strategy preserves funding stability and diminishes benefit declines. Coffing and Camp discuss the strategy in this article.

“Making the case for variable annuity pension plans (VAPPs): Basic VAPP benefits and design strengths”
This article provides examples of how a retiree’s basic VAPP benefits would change over different historical periods. The article also details the strengths and weaknesses of the VAPP design.

“Making the case for variable annuity pension plans (VAPPs): Stabilized VAPP benefits”
In this article, Coffing, Camp, and Ladd Preppernau discuss the stabilized VAPP model. The design involves building a reserve, spending the reserve in down markets to prevent benefit decreases, and improving benefits if the reserve is larger than is required to prevent benefit decreases.

Making the case for variable annuity pension plans (VAPPs): Shared retirement risks: How VAPPs stack up
There are four main risks associated with retirement plans: Investment risk, interest rate risk, inflation risk, and longevity risk. This article authored by Coffing, Camp, and Preppernau provides perspective on how VAPPs address these risks.

“A balanced approach to retirement risk”
VAPPs address several sponsor concerns like funding and accounting volatility. The design also helps alleviate participant concerns related to money management and inflation. Milliman’s Camp offers more perspective in this blog.

“Variable annuity plans may benefit employers and employees”
In this blog, Milliman’s Ryan Hart provides a chart comparing and contrasting VAPPs alongside defined contribution plans and traditional defined benefit plans.

“Variable annuity pension plans: An emerging retirement plan design”’
In this article, Coffing and Mark Olleman provide historical scenarios of how retirees’ benefits would vary over time under a VAPP structure.

“Variable Annuities: A retirement plan design with less contribution volatility”
Multiemployer plan trustees seeking sustainable ways to provide participants with lifelong benefits that allow for more predictable contributions may want to consider the VAPP design. This paper by Olleman, Coffing, and Preppernau explains the advantages that VAPPs offer single and multiemployers as well as their employees.

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 into 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.