Tag Archives: defined benefit

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 Dec. 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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PBGC proposes late payment penalty relief

Hagin NeilThe Pension Benefit Guaranty Corporation (PBGC) insures the pension benefits accrued by participants covered under private-sector defined benefit pension plans in the event the employer sponsoring the plan becomes insolvent. If a plan sponsor is unable to meet its benefit obligation to participants, the PBGC will pay the pension benefit, but only up to certain limits established under Department of Labor regulations.

PBGC collects premiums from the employers, i.e., plan sponsors, in order to provide this federally mandated insurance. The premium for single-employer plans has two components: a flat dollar (flat rate) premium, which is simply a flat dollar charge for each participant covered under the plan, and a variable rate premium, which is a percentage of the deficit between the pension assets and the actuarially determined pension obligation (also referred to as the “unfunded vested benefits”).

Recent pension law changes have increased both the flat and variable premium rates used to determine the total annual premium paid to insure single-employer defined benefit plans. As a result, plan sponsors are and will be paying substantially higher premiums than they have in the past. For example, the flat rate premium in 2012 was $35 per participant; in 2016 it is $64 per participant, and will increase to $80 per participant in 2019. In 2012 the variable rate premium was $9 per $1,000 of unfunded vested benefits. For 2016 the variable rate premium is $30 per $1,000 of unfunded vested benefits and will increase to at least $41 in 2019.

A consequence of the dramatic rise in PBGC premiums is that the penalty for submitting premium payments after they are due, i.e., filing late, has also increased, as the penalty imposed by the PBGC is determined as a percentage of the unpaid premium. Currently, the penalty for plan sponsors that self-correct an underpaid filing is 1% per month (capped at 50%) of the unpaid amount. A plan sponsor can self-correct a late filing as long as the PBGC has not notified the plan sponsor that there is or may be an underpayment. For plan sponsors that receive notice from the PBGC that there is, or may be, an underpayment, the penalty is 5% per month (capped at 100%) of the unpaid amount.

The PBGC recently proposed a reduction to the penalty amount to reduce the financial burden imposed on plan sponsors. The proposed rule change would reduce the penalty by 50%; the self-correcting penalty will be reduced from 1% to 0.5% per month with a 25% cap and from 5% to 2.5% per month with a 50% cap for filings in which the PBGC gives notice.

The PBGC also proposed creating a new penalty waiver for plan sponsors that have a “good” compliance history and that act promptly to correct any underpayments. A plan would be considered to have a good compliance history if payment of all premiums for the five plan years preceding the year of the delinquency was made on time. A late payment would not be assessed against a plan if the PBGC did not require payment of a penalty (e.g., when an entire penalty is waived). The PBGC would consider the correction to be prompt if the premium shortfall for which the penalty is assessed was made good within 30 days after the PBGC notified the plan in writing that there was, or might be, a problem. If both of the conditions are met, the PBGC will waive 80% of any resulting penalty. Under this scenario, the penalty would be reduced from 2.5% per month to 0.5% per month, which is the same amount as if the plan had self-corrected.

This proposal could drastically reduce the financial burden imposed on a plan for underpaid and late filings. For example, a plan with a $1 million premium that is two months late (after notice from the PBGC) would have a $100,000 penalty (two months at 5% per month times the amount outstanding) under the current regulation. Under the proposed regulation, this penalty would be reduced to $50,000. The penalty could be further reduced to $10,000, if the plan is eligible for the compliant plan partial waiver of 80%.

Comments on the proposal are due to the PBGC by June 27, 2016. Only after the comments are reviewed and finalized will plan sponsors know when these new reduced penalties would be effective. Until then, plan sponsors are urged to file on time to avoid the mandated penalties.

Multiemployer pensions lost $26 billion in funded status during the second half of 2015

Campe-KevinMilliman today released the results of its Spring 2016 Multiemployer Pension Funding Study, which analyzes the funded status of all multiemployer pension plans. In the second half of 2015, these pension plans experienced a funding percentage decrease of 4%, declining from 79% at the end of June to 75% at the close of 2015. During that time, pension liabilities for these plans increased by $8 billion and the market value of assets declined by $18 billion, resulting in a $26 billion increase in the funded status shortfall. Since undergoing a minor rally in funded status that peaked in 2013, multiemployer pensions have experienced continued deterioration in funded status.


Multiemployer plans continued to be stuck in a rut in 2015. Currently at least 76 plans with $28 billion of shortfall are projected to be insolvent at some point. These plans may be beyond help at this point, and several more may be headed this direction.

Results vary by plan. Of the plans studied, 192 were over 100% funded at year-end (compared with the 279 plans over 100% funded as of June 30, 2015). The number of plans that are less than 65% funded grew from 214 to 264. The most poorly funded pensions are of particular interest, because plans in “critical and declining status” may reduce benefits in an effort to stay solvent. Currently, 31 of the critical plans that have reported results have stated they are projected to go insolvent before 2025, and this number could rise as more plans file their reports.