Posts Tagged ‘defined benefit’

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.

PBGC variable premiums: Standard vs. alternative premium funding target

February 11th, 2014 No comments

Peatrowsky-MikeAs part of the Pension Protection Act of 2006 (PPA), plan sponsors have two options for calculating their “unfunded vested benefits” (UVB) to determine the variable premium owed to the Pension Benefit Guaranty Corporation (PBGC) each year. The amount by which the vested liability, called the funding target, exceeds the fair market value of plan assets determines the plan’s unfunded vested benefits. The required variable premium for 2014 is $14 per $1,000 of UVB.

The plan’s UVB is determined under one of two different methods: The standard premium funding target or the alternative premium funding target.

So what’s the difference?
The only difference in the two methods is the discount rate used. All other assumptions (mortality, turnover, etc.) are the same for both calculations. However, the discount rate plays a vital role in determining the plan’s funding target.

The standard premium funding target is the default method. The discount rate used for the calculation of the standard method is based on spot rates for the month prior to the plan year (i.e., a one month of average of such rates).

The alternative premium funding target is the other method. The calculation of the alternative method is based on the rates used to calculate a plan’s funding target for the premium payment year, before reflecting Moving Ahead for Progress in the 21st Century Act (MAP-21) stabilization rules. Typically, the discount rates used for the purpose are a 24-month average of the current spot rates.

When a plan sponsor elects to switch from one method to the other, they are locked into that election for five years.

Why is this important for 2014?
In a declining interest rate environment, as we experienced from the end of 2008 through the beginning of 2013, the trailing 24-month average produces higher interest rates than current monthly spot rates. Higher discount rates produce a smaller plan liability for PBGC purposes, resulting in smaller variable premiums. Many plan sponsors who had underfunded plans in 2009 elected to move to the alternative method. Over the past 12 months, we are in an increasing interest rate environment, making current monthly spot rates higher than a 24-month average.

So the question becomes: is 2014 the year to switch back to the standard method? Depending on funding status of the plan, it could decrease variable premiums by a significant amount. With the passage of the budget accord, as stated in Tim Herman’s blog, the amount of variable premiums is expected to increase significantly over the next few years. If the plan sponsor believes interest rates will continue to rise or stay flat over the next couple years, it may be time to make the switch. The flip side is that, if you switch and interest rates decline, you could be required to pay higher PBGC premiums and would be locked into this method for five years.

Retirement plans: Key dates and deadlines for 2014

January 31st, 2014 No comments

Milliman has published 2014 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.

2014 single-employer defined benefit plans calendar

2014 multiemployer defined benefit plans calendar

2014 defined contribution plans calendar

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

PBGC moves flat-rate premium due date for large plans

January 6th, 2014 No comments

The Pension Benefit Guaranty Corporation (PBGC) has issued a final rule moving the flat-rate premium due date for large defined benefit pension plans (those with 500 or more participants) from February 28, 2014, to October 15, 2014, for calendar-year plans. The new rule, which applies to both single-employer and multiemployer defined benefit pension plans, sets the flat-rate premium due date as the same date when variable-rate premiums are due, beginning with the 2014 plan year. No changes are made to the flat-rate premium due dates for smaller plans operating on a calendar-year basis: those with 100 to 499 participants continue to have an October 15 payment date for the current calendar year, and those with fewer than 100 participants continue to have an April 30 payment date for the prior calendar year.

On July 23, 2013, the PBGC proposed to replace the system of three premium due dates (based on plan size and premium type) with a single due date corresponding to the Form 5500 extended filing due date. The proposed rule also called for: coordinating the premium due date for a terminating plan with the termination process; conforming and clarifying changes to the variable-rate premium rules; providing penalty relief; and making other changes. Because of the time-sensitive aspect of the flat-rate premium due date, the PBGC finalized this particular change ahead of the proposed rule’s other revisions that the agency intends to address later in a separate final rule.

For additional information about the PBGC’s final rule, please contact your Milliman consultant.

PBGC premium increases in the federal budget agreement

December 20th, 2013 No comments

The U.S. Congress has approved and sent to the president a federal budget agreement that includes an increase in the annual premiums that sponsors of single-employer defined benefit plans pay to the Pension Benefit Guaranty Corporation (PBGC) to insure the plans in the event of a plan termination. The budget agreement, which the president will sign, includes no changes to the PBGC premiums for multiemployer pension plans. The budget accord’s PBGC provisions are effective for plan years beginning after December 31, 2013. This Client Action Bulletin offers more perspective.

Top 10 Milliman blogs items for 2013

December 19th, 2013 No comments

Milliman publishes blog content addressing complex issues with broad social importance. Our actuaries and consultants offer their perspective on healthcare, retirement plans, regulatory compliance, and more. The list below highlights Milliman’s top 10 blogs in 2013 based on total pageviews:

10. In their blog “Five keys to writing a successful qualified health plan application,” Maureen Tressel Lewis and Bonnie Benson highlight several best practices insurers should consider when submitting a qualified health plan application to the Health Insurance Marketplace.

9. “Understanding ACA’s subsidies and their effect on premiums” offers perspective into the relationship between healthcare premiums and federal subsidies for low-income individuals.

8. Funding for future Consumer Operated and Oriented Plans(CO-OPs) was eliminated as a result of the fiscal deal that was signed in December 2012. Tom Snook takes a look at how the deal affects CO-OPs in his blog “CO-OPs: An endangered species?

7. Robert Schmidt discusses why the methodology used to determine COBRA premium rates is essential in his blog “The growing importance of COBRA rate methodologies.”

6. A second blog by Maureen Tressel Lewis and Mary Schlaphoff entitled “Five critical success factors for participation in exchange markets” highlights tactics that insurers offering qualified health plans may benefit from implementing.

5. “Pension plans: Key dates and deadlines for 2013” offers Milliman’s three retirement plan calendars (defined benefit, defined contribution, and multiemployer) with key administrative dates and deadlines throughout the year.

4. In her blog “Fee leveling in DC plans: Disclosure is just the beginning,” Genny Sedgwick explains how investment expenses and revenue sharing affect the fees paid by defined contribution plan participants.

3. Maureen Tressel Lewis and Mary Schlaphoff’s blog “Five common gaps for exchange readiness” describes items issuers of qualified health plans have to resolve before their plans can be sold on the Health Insurance Marketplace.

2. In the lead up to implementation of the Patient Protection and Affordable Care Act (ACA), debate often centered on how the law would affect healthcare premiums. Our “ACA premium rate reading list” offers perspective on how rates may be affected.

1. In his blog “Retiring early under ACA: An unexpected outcome for employers?,” Jeff Bradley discusses the impact that the ACA could have on both early retirees and plan sponsors.

This article was first publish at Milliman Insight.

Year-end compliance issues for single-employer retirement plans

November 13th, 2013 No comments

By year-end 2013, 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, 2013.

COLAs for retirement, Social Security, and health benefits for 2014

November 6th, 2013 No comments

With the release of the September 2013 Consumer Price Index (CPI) by the U.S. Bureau of Labor Statistics, the Social Security Administration (SSA) and the IRS have announced cost-of-living adjustment (COLA) figures for Social Security and retirement plan benefits, respectively, for 2014. The 2014 adjusted figures for high-deductible health plans (HDHPs) and health savings accounts (HSAs) included in this Client Action Bulletin were released by the IRS earlier this year and are provided here for convenience.

Measuring retirement confidence

October 15th, 2013 No comments

Bleick-TimAccording to the 2013 Retirement Confidence Survey by the Employee Benefits Research Institute, 49% of American workers are not too confident or not at all confident that they will have enough money to live comfortably throughout their retirement years. Sure, the current state of the economy has a lot to do with that, as well as people not saving enough. And, of course, younger people tend to be less confident about Social Security.

But I think a good chunk of the lack of confidence is actually a lack of understanding about how much it will take to live comfortably. Saving for retirement is not like saving for anything else. If you are saving for a new car, you know precisely when you have enough money to buy that car. How do you know when you have enough money for retirement?

There are so many unknowns after retirement. And the main one is that people don’t know how long they are going to live. A big fear of retirees is outliving their assets, otherwise known as longevity risk. But there are some retirees who are more confident that they won’t outlive their assets: retirees with defined benefit (DB) pension plans.

A pension plan pays a benefit amount every month until a person dies. That can’t be outlived. The monthly amount is typically based on the number of years of service with an employer and may be tied to salary. If the person is married, the benefit can continue to a spouse after death.

Problem is, though, that these types of plans are becoming less and less prevalent every year, as companies are freezing and/or terminating them. So even if the economy gets back on track and people can start saving more, it’s not clear we’ll see an improvement to the confidence level of American workers as to whether or not they will have enough money to live comfortably throughout their retirement years.

I recall a series of commercials a few years ago that showed people walking around with six or seven digit numbers, looking confident, as if that were the precise number they needed to retire. How much more confident would they have been walking around with their defined benefit pension plans?