Tag Archives: defined benefit

Retirement plans: Key dates and deadlines for 2017

Milliman has published 2017 retirement plan calendars for single-employer defined benefit (DB) plans, multiemployer DB plans, and defined contribution (DC) plans. Each calendar provides key administrative dates and deadlines.

2017 single-employer DB calendar
2017 multiemployer DB calendar
2017 DC 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.

New mortality assumptions proposed for defined benefit retirement plans

The Treasury Department and the IRS released a proposed rule on December 29, 2016, to update the mortality assumptions that tax-qualified defined benefit pension plans use to calculate the contributions required under the minimum funding standards of Internal Revenue Code section 430. The proposed effective date is for plan years beginning on or after January 1, 2018; no immediate action by plan sponsors is necessary with regard to the proposed tables, which are expected to increase the plan’s actuarial liabilities and annual benefit accrual costs (i.e., “target liability” and “target normal cost,” respectively).

Once finalized, the mortality tables will also be used to develop pension obligations for reporting to the Pension Benefit Guaranty Corporation (PBGC), and Treasury and the IRS will publish a blended version of the tables to be used to calculate “non-level” optional forms of pension payments (e.g., lump-sum distributions) under tax code section 417(e).

The proposed rule adopts base mortality tables derived from the most recent study of the Society of Actuaries’ (SOA) Retirement Plans Experience Committee, with 2006 being the central year of the mortality experience, and mortality improvement rates from the SOA’s most recent mortality improvement study (“MP-2016”). The proposed rule offers three choices for selecting mortality tables: “static” tables, “generational” tables, and “plan-specific substitute” tables.

The table below illustrates the increases in actuarial liabilities for sample lives (comparing 2017 vs. 2018 “static” tables at an interest rate of 4%):

Age Male Female
45 (deferred to 65*) 2.8% 6.2%
55 (deferred to 65*) 2.8% 5.9%
65 (in pay status) 3.5% 4.6%
75 (in pay status) 7.2% 4.8%
*The pension benefit commences at age 65.

Plan sponsors should not draw any conclusions of the financial impact on actuarial liabilities or possible increases in cash contributions for a specific pension plan. The benefit formulas, plan demographics, status (“frozen,” “partially frozen,” “open”), and other complex variables are unique to a given plan and must be carefully evaluated.

The IRS seeks public comments on the proposed rule by March 29 and will hold a public hearing in April for plan participants, plan sponsors, pension actuaries, and other interested parties to express their views before issuing a final rule.

For additional information about the proposed revised mortality tables, please contact your Milliman consultant.

Year-end compliance issues for single-employer retirement plans

By year-end 2016, sponsors of calendar-year single-employer retirement plans must adopt necessary and discretionary plan amendments to ensure compliance with the statutory and regulatory requirements of ERISA and the tax code. This Client Action Bulletin looks at key areas—including administrative compliance issues—that sponsors of such defined benefit (DB) or defined contribution (DC) plans should address by December 31, 2016.

A review of 2017 PBGC premium rates

carnaval-nicholasThe Pension Benefit Guaranty Corporation (PBGC) recently released the premium rates for the 2017 premium filing year. Each defined benefit plan sponsor must pay annual premiums if insured by the PBGC. Sponsors of single-employer and multiple-employer plans pay premiums consisting of two parts: (1) a flat-rate premium (FRP), equal to a fixed dollar amount per plan participant, and (2) a variable-rate premium (VRP), based on a percentage of unfunded liability. The latter part is limited by a cap that acts akin to the FRP, where the VRP cannot exceed a fixed dollar amount per plan participant. Multiemployer plans are only subject to the FRP.

Single-employer and multiple-employer plan sponsors will incur a 2017 FRP of $69 per plan participant (a 7.8% increase from the $64 premium paid in 2016). The 2017 VRP has increased to 3.4% of unfunded liability (a 13.3% increase from the 3.0% rate paid in 2016). The per-participant cap on VRPs increased 3.4% from $500 to $517 for the 2017 premium filing year.

Since 2012, single-employer and multiple-employer plan sponsors have seen sharp increases in PBGC premiums, which were written into funding relief rules under the Moving Ahead for Progress in the 21st Century Act (MAP-21) and subsequent relief under the Bipartisan Budget Act of 2015 (BBA). These laws called for scheduled increases in premiums along with indexing for inflation. Flat-rates have nearly doubled since the pre-MAP-21 level of $35 per plan participant in 2012; while the variable-rate of 3.4% has almost quadrupled since 2012. Such sharp increases in the variable-rate have resulted in VRPs approaching the more modestly increasing per-participant cap introduced by MAP-21 for many plan sponsors. This makes de-risking strategies that reduce the number of plan participants (such as terminated vested lump-sum windows and annuity purchases for retiree populations) more attractive. This is because reducing the number of participants in the plan decreases the FRP and may also lower the VRP if limited by the cap.

Being limited by the per-participant VRP cap can offer some advantages to plan sponsors hypersensitive to cost volatility. De-risking strategies such as spin-offs and partial plan terminations have been developed to reduce premiums and target these advantages. Capped VRPs are generally less volatile than uncapped VRPs. Such premiums are based on participant counts, which are likely to be relatively stable from year to year (and are actually expected to decrease in a plan with frozen participation). They are not subject to the market volatility inherent in asset returns and liability, which is determined using market-related interest rates. Capped VRPs are also not subject to the sharp scheduled increases outlined in BBA. They are subject to increases due to inflation, which are typically more modest than the scheduled VRP increases.

Multiemployer plan sponsors will also incur higher 2017 PBGC premiums. Taft-Hartley plan sponsors will experience an increase in FRPs of 3.7% from $27 to $28. The 2017 level represents a 211% increase over the 2012 PBGC premium rate of $9 per plan participant. Large increases in premiums were enacted through the Multiemployer Pension Reform Act of 2014 (MPRA) as a response to the PBGC’s dire multiemployer program situation. According to a recent issue brief from the American Academy of Actuaries, the program is projected to become insolvent within eight years partly due to historically inadequate premiums. As a result, the PBGC will not be able to support fully guaranteed benefits for troubled multiemployer plans.

The 2017 premium filing year will not be the last time rates increase; more premium rate increases are scheduled in the future. All PBGC premium rates will increase because of inflation; however, the FRP and VRP for single-employer and multiple-employer plans have additional scheduled increases. The FRP for single-employer and multiple-employer plans is scheduled to increase to $74 and $80 per plan participant in 2018 and 2019, respectively (ultimately a 129% increase over the 2012 level). The VRP is scheduled to increase to 3.8% and 4.2% of unfunded liability for 2018 and 2019, respectively (ultimately a 367% increase over the 2012 rate). Multiemployer premiums are currently only indexed to inflation with no scheduled escalations. However, according to the same issue brief from the American Academy of Actuaries, increases of around six times current levels would be necessary for the program to remain solvent through 2035, with even larger increases needed for longer-term solvency and protection from adverse experience.

The 2017 PBGC premium rates represent a significant increase from where they were only five years ago. This has led to the development and implementation of various de-risking strategies aimed at reducing the cost of maintaining defined benefit plans. Due to regulated increases, anticipated inflation, and uncertainty within the PBGC’s multiemployer program, higher premiums are expected for years to come.

Not-for-profit reduces payroll using voluntary early retirement program

In his article “Reducing payroll without involuntary terminations,” pension actuary Zorast Wadia discusses how Milliman helped a not-for-profit client reduce its payroll through a voluntary early retirement program (VERP).

Here is an excerpt:

The client considered a VERP that offered numerous types of incentives, including:

• Additional years of service and/or age credits
• Cash payment(s)—for example, one or two weeks of pay for each year of service
• Additional benefits, such as an extension of health coverage
• “Bridge” payments, where employees are paid an annuity from their termination date to a fixed date (such as age 62 or 65). …

…The window was offered to participants who were age 57 or older with early retirement benefits being calculated as if retiring participants were two years older with an additional two years of service. The additional years of service reward participants retiring early with higher benefits while the additional age criteria results in a lower reduction in benefit for most of the participants in the window group who would be retiring early. The client decided against offering an extension of health coverage because this option was deemed too costly.

The client also decided to amend the early retirement provisions in the retirement plan for future retirees. The early retirement eligibility was lowered from age 60 with 20 years of service to age 58 with 10 years of service going forward. The client felt that these changes would allow for a more orderly retirement of the work force and help facilitate work force transitions better in the future. Thus, not only was the client able to continue rewarding its employees with a strong retirement program, it was also able to redesign the retirement program to accomplish its human resource objectives.

Avoiding poverty in a DC-only world

Bradley_JeffIn a defined contribution (DC) world, retirees are forced to make critical decisions, often with little or no assistance. Most of these individuals choose to take a single lump-sum distribution either immediately or soon after they terminate employment.

This paper from the Center for Retirement Research at Boston College asserts that distribution provisions in DC plans are critical factors in evaluating the risk of falling into poverty in old age.

Specifically, the paper states that reliance on non-annuitized DC benefits with fairly easy access to lump-sum distributions puts elderly households at risk of not having sufficient income (or assets) to sustain themselves or, if they are not already in poverty at retirement, falling into poverty as the household members age or die off.

As workers continue to age, this will become a greater problem as those covered by defined benefit plans retire from the workforce and are replaced by those covered only by DC plans. So what can plan sponsors do to minimize the probability of their retirees falling into poverty?

Extrapolating from thoughts in the paper, the conclusion is that plan sponsors should encourage the following behaviors:

• Not taking lump-sum distributions before retirement
• Annuitizing some or all DC benefits when possible
• Choosing joint-and-survivor options when available

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