Tag Archives: defined benefit

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.

New developments affecting defined benefit pension plans

Several key developments—in the form of Internal Revenue Service (IRS) guidance, Pension Benefit Guaranty Corporation (PBGC) proposed regulations, and a new law—have occurred recently for employers that sponsor defined benefit pension plans. This Client Action Bulletin provides an overview of these items, which affect: the mortality tables used for a variety of pension plan requirements; the elimination of lump-sum payouts to current annuitants as part of a “de-risking” strategy; the reporting of financial and actuarial information by “underfunded” plans; and transfers of excess plan assets to retiree health and group-term life accounts.

What changes will you make to help increase your employees’ retirement confidence?

Regli-JinnieThe 2015 Retirement Confidence Survey, published by the Employee Benefit Research Institute, continues to highlight the rise of retirement confidence in American workers. An increase in retirement plan participation (14% in 2013 to 28% in 2015 for those with a retirement plan) seems to closely correlate with the rise in the percentage of workers who are confident about having enough money in retirement (13% in 2013 to 22% in 2015).

The survey findings seem to indicate that more American workers are taking retirement planning into account and they are feeling very confident about having enough money in retirement, both of which may be related to the increase in availability and accessibility of online retirement calculators and a growing confidence in the overall economy. Yet at the same time, the percentage of American workers who report having saved for retirement has stayed fairly consistent at 63%, indicating that more may need to be done in order to assist workers in saving. Here are a few standout figures from the 2015 survey results:

• 80% of current workers believe personal savings will play a large role in their retirement incomes
• 71% of employed workers report their employers offer an employer-sponsored retirement savings plan
• 12% of those without a retirement plan reported feeling very confident
• 50% of those asked what they would do if they were automatically enrolled at 3% said they would raise their contribution rate; only 2% said they would stop it altogether

It seems that, as the economy strengthens, many American workers are comfortable making retirement savings a priority, so what better time to encourage them to make the most of it?

As plan sponsors, what can be done to help keep retirement confidence on the rise for years to come? Here are some ideas.

• If you don’t offer an employer-sponsored plan, consider offering one. Behavioral finance has found that inertia makes humans their own worst enemies when it comes to retirement savings, making it all that more difficult for the 29% of employed workers without an employer-sponsored retirement plan to save for their retirement. Open the door for them to begin saving today!
• If you already offer an employer-sponsored plan, think about offering additional employer-sponsored plans. Employee stock ownership plans (ESOPs), nonqualified retirement plans, cash balance plans—there are a variety of options available that could be used to supplement your current 401(k) plan.
• Or continue to drive participation by considering plan design changes that will promote additional plan participation. Speak with your consultant about the best options for your company.
• Educate participants. Make sure your employees have sufficient information and tools to assist in their retirement planning.

What changes will you make to help your employees’ retirement confidence increase?

The Dutch General Pension Fund, a new pension vehicle

Wouda-MartinThe total of assets of Dutch pension funds is over 150% of gross national product and still growing. The number of Dutch pension funds, however, keeps falling: from 800 to less than 400 in the past 10 years.

The attention of the press on pension issues has increased from close to zero to daily reports. At the same time, the political and public debate has intensified—especially when it became clear that some pension funds had to cut benefits because the insufficient funding could not be solved over time. Until the day that the actual cuts were announced, this risk was quite underexposed. One of the last items that gets the attention of the press, politicians, and the public is the obligation to account for the cost per participant in the annual reporting.

The reaction of the supervisor is to aim for more control, more regulations, and more compliance. The Dutch Central Bank (DNB) has recently sent out a note to all small pension funds, asking them to consider their reasons for future existence and to contemplate their sustainability.

Regulations are relatively tight compared to other countries. For example, the discount rate to be used to value liabilities is prescribed and published monthly by the Dutch Central Bank. Also there are standard formulas to calculate the solvency buffer. This is in contrast to one of its neighboring countries: Belgian pension funds choose the discount rate and solvency buffer themselves and need to submit it to the supervisor (well documented).

New pension fund board members are heavily tested on capacities and integrity by the supervisor. Some of the candidates that have been rejected have shared their stories with the press, but in most cases the DNB silently advises the candidates to step down before actually refusing to let them join a board of trustees.

Many of the smaller pension funds have transferred all accrued benefits to an insurer in the past 10 years. The disadvantage of this option is clear. The security one gets from an insurer comes with a price. The pension funds are used to taking some investment risk: the indexation depends on how the investment returns turn out. In case of really poor investment returns, there is in some cases the possibility of extra contributions by the sponsor. Pension funds also have the emergency brake of cutting benefits. The insurers, on the other hand, would be bankrupt, so their pricing of annuities is more prudent. The insurers do have the advantage of cost efficiency, which is due to the larger scales of their operations. An alternative for the smaller pension funds is to join a larger sector-wide pension fund. Joining a sector fund means joining the scale and risk pooling of the pension plan in the sector and can be attractive if there is indeed a sector pension fund active and large enough in the sector of the particular employer.

For multinationals with operations in more than one European country, there is the option of a cross-border pension fund. There is a small number of successful cross-border pension funds with Dutch plans. It appears to be a time-consuming road, as many parties need to be convinced. That is not always based on rational arguments: How would the average American employee react if his or her pension moved to Canada? There are Dutch pension vehicles (PPI’s) that can execute pension plans for foreign entities, but by law they can only do defined contribution (DC) plans. The PPI’s are not allowed to carry biometric risks. The Dutch may believe their pension system is the best in the world, but there is less confidence that it is convincing enough to attract foreign plans. Becoming able to execute cross-border plans is not the driver for the latest development.

The law will be changed to allow establishing pension funds that execute more than one plan for any employer. It will be allowed to ring fence the assets for different (groups of) contracts. Up to now, having multiple employers within one pension fund is only possible either for employers that are connected (legally or historically) or without the ring fencing (e.g., the sector funds). The new vehicle will be called the General Pension Fund (GPF, or APF in Dutch). It will allow for options that can be situated between insurers and the classic pension funds. If done well, it combines the best of both worlds: economy of scale, optimizing the investment returns, good governance without being too time-consuming, and risk pooling that is acceptable to members. In our opinion, it opens the door for new and innovative pension solutions.

Risk sharing within pension plans in the Netherlands

Sagoenie-RajishDutch pension system
Like many other European countries, the Netherlands operates a three-pillar pension system. This consists of:

1. A government-provided pension.
2. An employer-provided pension.
3. Personal pensions purchased through individual savings.

The first pillar, government pension, provides a basic income to retired people in the Netherlands. It is financed through taxes and is based on a pay-as-you-go system. The pension provided is linked to the country’s minimum wage. An amount of 2% of the state pension benefit is accrued for each year that an individual has lived or worked in the country until the age of 67, with a maximum period of 50 years taken into account. Depending on the increase in nationwide longevity, the age of 67 will increase.

The second pillar consists of occupational pension schemes. Companies offering their employees a pension plan are obliged to administer these plans externally via a pension fund or an insurance company. Funding for these schemes is provided through employer and member contributions and is based on capitalization. A majority of employers used to bear all the risk for these schemes but, in line with globally changing attitudes, there has been a move toward risk-sharing types of schemes. This pillar is discussed in further detail below.

The third pillar consists of annuities and pensions bought from individual savings. It is the main source of postretirement income for self-employed individuals and individuals working for organizations that do not provide a pension. To encourage people to make use of this pillar, tax incentives (within limits) are provided by the government.

In 2014 and 2015 the tax incentives in the second and third pillars were further limited. The annual salary on which the pension is based is limited to EUR 100,000.

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