Tag Archives: defined benefit

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.

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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.

Funded status deficit increases to $390 billion after rates fall below 4%

Wadia_ZorastMilliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In March, these pension plans experienced a $20 billion decrease in funded status, which was due to a $30 billion increase in asset values and a $50 billion increase in pension liabilities. The funded status for these pensions decreased from 78.4% to 77.9%.

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These pensions lost $83 billion in the first quarter. We saw impressive asset performance last month, but with rates slipping back below 4% for the first time since May 2015, we have an even deeper pension funding hole. Hopefully this trip below 4% is brief—the prior visit to record-low territory lasted seven months.

This edition of the PFI reflects the annual update of the Milliman 2016 Pension Funded Study, which was released on April 7.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.23% by the end of 2016 and 4.83% by the end of 2017) and asset gains (11.2% annual returns), the funded ratio would climb to 86% by the end of 2016 and 98% by the end of 2017. Under a pessimistic forecast (3.33% discount rate at the end of 2016 and 2.73% by the end of 2017 and 3.2% annual returns), the funded ratio would decline to 73% by the end of 2016 and 66% by the end of 2017.

Retirement plans: Key dates and deadlines for 2016

Milliman has published 2016 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.

2016 single-employer DB calendar
2016 multiemployer DB calendar
2016 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.

Keep your employees warm during a pension plan freeze or termination

Bentz-JulieYour pension plan is frozen. Your pension plan is terminating. While the temperature for pension plans continues to drop, don’t leave your participants out in the cold.

In today’s business environment, employers continue to shift more and more of the responsibility for their benefits to employees. A few examples come to mind, including high-deductible health plans with health savings accounts (HSAs), wellness programs, and telemedicine. How employees save for retirement is certainly near or at the top of that list. Your decision to freeze or terminate your pension plan may not come as a big surprise to your participants. But that doesn’t mean that they will understand what this decision really means for them or what they need to do to stay on track for a secure retirement.

A pension freeze or termination can lead to a lot of logistical and regulatory hurdles for both company management and the plan administrator—for example, in the case of a termination, improving the funded status of the plan, submitting government filings, and finding lost participants. The up-front data cleanup project for a termination alone may leave a chilly feeling in the air. Aside from what’s required, consider how you can help your participants make this important transition.

1. Start early. As with most change management communication, begin communicating with your employees as soon as possible. You don’t want them to find out what you’re planning through watercooler gossip or the local newspaper.
2. Be direct. Help your participants understand the business reasons for the change. Remember that your active employees aren’t the only ones who may need to warm up to the idea. Former employees with a vested benefit in the plan and former employees who are retired and already receiving a monthly check also need to be in the loop on what’s happening.
3. Promote the good news. Let your employees know if there’s still “free” money to be had. Now is a good time to remind employees about any matching or profit-sharing contributions that you make to your defined contribution (DC) plan. A pension plan was always intended to be only a piece of the retirement savings puzzle. With the pension plan going away, the rest of the retirement pieces take on greater importance.

With the shift in focus from a pension plan to a DC plan, you can also make employees aware that they’re now in control of their retirements. They control how much they contribute; they control where the funds get invested. Employees will now be the arbiter of their own retirement destinies. Through research and use of the saving and investing tools that your plan offers, they can continue to be or become informed consumers.

Overall, this process might be complicated for you as a plan sponsor. However, employees may also feel confused and uncomfortable—even frozen just like the plan. Through effective communication, you can help them decide whether to save more in their DC plans, and in the case of terminations, whether to take a one-time lump-sum distribution or stick with the annuity. Guide them to a resource where they can receive sound financial advice. And help them to understand their options so they can avoid the potential taxation pitfalls related to these types of decisions.

Keep your employees informed before, during, and after the process. This open line of communication will help you maintain positive employee relations long after the project is done. After all, just because your plan is undergoing a freeze or termination doesn’t mean you can’t help everyone feel warm and fuzzy about their benefits.

What’s ahead for RP-2014 mortality table users?

Hagin NeilThe Society of Actuaries Retirement Plans Experience Committee (RPEC) published an October 2014 study analyzing mortality experience of uninsured private defined benefit pension plans in the United States for the period 2004 through 2008. It is referred to as the “RP-2014” mortality table report. RP-2014 replaces RPEC’s “RP-2000” mortality tables published in July 2000.

While the RP-2014 report may imply there is only one mortality table, there are several mortality tables published within the report. A companion report was concurrently published detailing a “mortality projection scale,” referred to as the “MP-2014” improvement scale. Because mortality studies are not completed all that frequently, mortality improvements scales are developed to be used in conjunction with a mortality table to project future mortality improvements.

Since the release of the two RPEC reports, defined benefit pension plan sponsors felt compelled to reflect the longer life expectancies in the determination of defined benefit plan liabilities for financial disclosures. For those plan sponsors that elected to change the plan’s mortality assumption to RP-2014 with projection scale MP-2014, it generally increased the plan’s liability between 4% and 10%. The impact on a plan was dependent on that plan’s demographics as well as on the mortality table that was previously used.

RPEC published a revised mortality improvement scale in October 2015, appropriately labeled “MP-2015.” Additional mortality data published by the Social Security Administration (SSA) was used for the new calculation.

RPEC had indicated within the MP-2014 report that it intends to publish updated improvement scales at least triennially. However, an updated report issued one year after RP-2014 was a surprise to defined benefit pension plan sponsors, as well as many pension actuaries.

The MP-2014 mortality improvement scale was constructed based on a model developed by RPEC utilizing SSA mortality data between 1950 and 2009. The MP-2015 mortality improvement scale incorporates two additional years of SSA data (2010 and 2011). The SSA data indicates that mortality rates remained relatively constant for 2010 and 2011. This is in contrast to the expectations of the MP-2014 calculations, which predicted mortality improvement for this period. Plans that utilized the RP-2014 mortality table with MP-2014 mortality improvement scale may see a 0% to 2% decrease in plan liabilities by utilizing the MP-2015 mortality improvement scale in their fiscal year-end financial disclosures.

The SSA has recently released two additional years (2012 and 2013) of mortality data, which again indicate that the mortality rates are not decreasing as significantly as expected. In fact, this newly released data suggests that mortality rates have been stagnant over the last five years. The RPEC committee has indicated that it intends to issue future periodic updates to the model as soon as practicable, following the public release of updated data upon which the model is constructed.

The question is when will a new mortality improvement scale, reflecting the latest SSA data from 2012 and 2013, be released? Will RPEC issue “MP-2016,” a new mortality improvement scale reflecting the latest SSA mortality data?

The MP-2015 report states that RPEC will not publish any additional information before the second quarter of 2016. Unfortunately, because of the timing of the release, a new mortality improvement scale (MP-2016 potentially) will not be available for disclosures with fiscal years ending in 2015. However, the updated mortality improvement scale may be able to be incorporated into the net periodic pension expense determination for fiscal years ending in 2016. This will be dependent on the timing of the RPEC analysis and publication, as well as approval by the plan sponsor’s auditor.

Year-end compliance issues for single-employer retirement plans

By year-end 2015, 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, 2015.

Multiemployer pension plans experience slight decline in funded status during the first six months of 2015, may face further funding challenges ahead

Campe-KevinMilliman today released the results of its Fall 2015 Multiemployer Pension Funding Study (MPFS), which analyzes the cumulative funded status of all U.S. multiemployer pension plans. These pension plans showed little movement in the last six months, dropping from 80% as of December 31, 2014, to 79% as of June 30, 2015.

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The study noted that the market value of assets for all multiemployer plans decreased by $1 billion. The liability for accrued benefits grew by $7 billion and resulted in an increase in the funded status shortfall of $8 billion.

Multiemployer pension plans have not experienced the kind of equity returns hoped for this year, and recent stock market volatility has only compounded the funding challenges. We’ve added a new twist to this latest study, forecasting how various returns would affect funded status. A strong six months of double-digit returns could push pension funding for multiemployer plans slightly over 87%, while a 7% decline would drop funded status below 72%.

As of June 30, 279 multiemployer plans are over 100% funded, with an aggregate surplus of approximately $6 billion, unchanged from December 31, 2014. The shortfall for multiemployer plans less than 65% funded grew from $60 billion to $65 billion. This group now represents about 17% of all plans and continues to account for more than half of the aggregate deficit for all multiemployer plans of $125 billion.

The study also found that there has been significant recovery from the low point in 2009, but that the aggregate funded percentage has yet to return to pre-2008 levels.

Weighing income options can prepare individuals for retirement

Pushaw-BartPension plans are providing an ever-decreasing portion of retirement wealth as wave after wave of Baby Boomers reach retirement. In and of itself, this is neither surprising nor remarkable. What is remarkable, though, are two typical characteristics of what we are being left with regarding retirement wealth.

First, the jettison of pension plans means relying on defined contribution plans as the provider of principal retirement wealth. This is suboptimal inasmuch as these plans are typically 401(k) savings plans, originally introduced as a sideline fringe benefit scaled for purposes less than what they’re now required to deliver on. This is mostly a benefit-level issue of which we have seen recent hints of amelioration—namely, the industry recognizing that in an all-account-based retirement world, saving 16% of annual pay is in the ballpark, not the historical mode of 6% employee deferral (plus maybe 6% employer match totaling 12%). This relates to the second endangered characteristic, which needs to be brought into brighter focus: an in-plan solution for generating guaranteed retirement income.

Pension plans are wonderful for participants in that everyone is automatically a participant, automatically earning benefits on a meaningful trajectory, and automatically having the ultimate retirement wealth delivered on a lifetime guaranteed basis. Yes, 401(k) plans are trending this way on the first two, and the third is quickly emerging as another area where we need more pension-like alternatives.

One may generalize by saying that retirees take their 401(k) balances and roll them over when they retire. An economic conundrum baffling academics is that none or very few of these folks take advantage of insured annuities even in the midst of robust studies identifying them as an optimal solution for retirement income in face of investment uncertainty and longevity risks. This raises two subtle yet important points.

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Preparing for a pension plan termination

A plan sponsor’s decision to terminate a defined benefit pension plan requires significant due diligence and research. This Milliman paper, authored by actuary Bart Pushaw, addresses several items a plan sponsor should consider, including the difference between a freeze and a termination, types of terminations, the path to termination, and the termination process. Figure 5 below highlights the process of terminating a pension plan.

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Calculating postemployment benefits in Indonesia

In Indonesia, there are two types of retirement plans used to fund postemployment benefits: defined benefit pension plans (PPMPs) or defined contribution pension plans (PPIPs). These plans are usually referred to as hybrid plans when liabilities for postemployment benefits are calculated. In this article, Milliman’s Danny Quant and Amelia Enrika discuss the most effective way to calculate benefits between the offset method and the asset method.