Tag Archives: HATFA-14

PPA segment rates: Looking ahead

Kliternick-StuartBack in April, I had discussed that the process used to determine the Pension Protection Act (PPA) segment rates under the Highway and Transportation Funding Act of 2014 (HATFA) was so stable that one could predict the segment rates to be used in the next several years with strong accuracy. Using 5,000 stochastic simulations of the yield curve, assuming funding laws in effect at that time and based on Milliman’s capital market assumptions and published surveys of interest rate forecasts by economists, it appeared that the 2016 PPA segment rates were all but finalized. Those predicted segment rates match what the PPA segment rates will be in 2016: 4.43%, 5.91%, and 6.65%.

Since then, the Bipartisan Budget Act of 2015 (BBA) was signed into law on November 2. BBA extended the current corridor used as the floor and ceiling for PPA rates. The range of 90% to 110% was extended for three years through 2020, when the corridor will widen annually by 5 basis points on both sides until it reaches a range of 70% to 130% for the 2024 plan year and beyond. In addition, BBA also provided the Pension Benefit Guaranty Corporation (PBGC) flat-rate premium and the variable-rate premium percentage to be used for the next several years (subject to indexing).

In order to account for these changes, we have updated our segment rates projections for the next several years. The first table below projects for 2016 to 2019, showing the 50th percentile of the 24-month average rates (assuming a calendar-year plan with no look-back period), and a range using the 5th and 95th percentile rates as endpoints for 2016 to 2019.

Year 2016 2017 2018 2019
First Segment Rate 1.41% (1.31% – 1.53%) 1.80% (0.93% – 2.92%) 2.25% (0.48% – 4.70%) 2.66% (0.30% – 5.88%)
Second Segment Rate 3.96% (3.88% – 4.05%) 4.13% (3.40% – 4.96%) 4.49% (2.95% – 6.28%) 4.70% (2.71% – 7.14%)
Third Segment Rate 4.99% (4.92% – 5.07%) 5.16% (4.49% – 5.86%) 5.51% (4.18% – 6.96%) 5.68% (4.01% – 7.52%)

As the table indicates, interest rates are expected to rise over the next several years. Short-term rates are projected to rise by as much as 125 basis points, while mid-term and long-term rates are projected to rise by about 70 basis points.

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Projected funding rates for the next several plan years

Kliternick-StuartThe assumptions actuaries use to calculate funding and accounting liabilities for defined benefit (DB) plans are in the process of undergoing revisions over the next several years. The Society of Actuaries recently released new mortality and mortality projection tables and, even though the Internal Revenue Service has yet to adopt the new mortality tables for funding purposes, several plans are using either these tables or a modification of the current standard tables when calculating their accounting disclosure liabilities. Actuarial Standards of Practice (ASOPs) will encourage actuaries to review other demographic assumptions (e.g., withdrawal) and economic assumptions, such as the consumer price index (CPI). And, as the Milliman Pension Funding Study shows, the discount rates used for accounting purposes have fluctuated.

However, because of recent law changes made by the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Highway and Transportation Funding Act of 2014 (HATFA), pension funding discount rates for plans that use segmented interest rates have been relatively stable for the past several years. In fact, the process used to determine the segment rates under HATFA is so stable that, absent additional funding rules changes, one can predict with reasonable accuracy the segment rates to be used for funding valuations for the next several plan years.

As an example of the stability of the process for calculating the HATFA rates, assume that the yield curve used to calculate the segment rates remains constant from February 2015 (the most recent yield curve released as of this blog post) through September 2015. The calculated rates used to establish the HATFA corridor would be 4.92%, 6.57%, and 7.39%. The low-end segment rates of the HATFA corridor, which make up 90% of those rates, are 4.43%, 5.91%, and 6.65%. They would be the rates used for 2016 plan year valuations. These rates do not change even if the yield curve used to calculate the segment rates were to increase by 42 basis points each month through September 2015 or decrease by 19 basis points each month.

We have calculated 5,000 stochastic simulations of the Pension Protection Act of 2006 (PPA) yield curve, assuming current funding laws remain in place throughout this calculation and using Milliman’s capital market assumptions. The table below shows the results for the next four years showing the 50th percentile of the 24-month average rates (assuming a calendar-year plan with no look back period), and a range using the 5th and 95th percentile rates as endpoints for 2015-2018.

Year 2015 2016 2017 2018
First Segment Rate 1.22% 1.48%(0.94%-2.11%) 1.89%(0.46%-3.71%) 2.30%(0.16%-5.11%)
Second Segment Rate 4.11% 3.94%(3.49%-4.42%) 4.04%(2.81%-5.37%) 4.36%(2.55%-6.50%)
Third Segment Rate 5.20% 4.96%(4.56%-5.37%) 5.04%(3.98%-6.17%) 5.40%(3.86%-7.08%)

As the table indicates, short term interest rates are projected to rise over the next several years, perhaps as much as over 100 basis points. Mid-term and long term rates are projected to initially fall and then rise about 20 to 25 basis points over the next several years. As such, the effective interest rate on this basis would rise by about 25 basis points depending on the plan’s payout streams.

Next, the following chart provides the 50th percentile of the stochastic simulations of the low end of the HATFA rates through the 2018 plan year, and a range using the 5th and 95th percentile rates as endpoints for each segment for 2015-2018. As a reminder, the segment rate to use when calculating liabilities is the greater of the 24-month average rate and the low-end HATFA corridor rate. Therefore, if the HATFA rate is lower than the 24-month average rate, the 24-month average rate will be used in the stochastic simulation.

Year 2015 2016 2017 2018
First Segment Rate 4.72% 4.43%(4.43%-4.44%) 4.16%(4.13%-4.19%) 3.71%(3.63%-5.10%)
Second Segment Rate 6.11% 5.91%(5.91%-5.91%) 5.72%(5.70%-5.74%) 5.23%(5.16%-6.50%)
Third Segment Rate 6.81% 6.65%(6.65%-6.65%) 6.48%(6.46%-6.50%) 5.96%(5.90%-7.08%)

As this table indicates, despite the rise in the 24-month average rates, the HATFA rates drop by 85 to 101 basis points. This would cause a typical plan’s effective interest rate for funding purposes to drop by 84 basis points from 2015 to 2018, which leads to an increase in the Target Liability by over 10.5%. The large drop in the HATFA rates from 2017 to 2018 is due to two reasons: the HATFA corridor widens by 5% starting in 2018 so the low end of the corridor is now 85% of the 25-year average used to calculate the HATFA rates; and the highest rates in the 25-year average used to calculate the HATFA rates are removed by 2018.

Based on the stochastic simulations, it would appear that the 2016 plan year HATFA segment rates have already been determined. The 5th to 95th percentile interval around the midpoint rate is the same except for an increase of one basis point in the first segment, and the 24-month average rates do not approach the HATFA rates. In addition, it can reasonably be predicted that the 2017 rates will be the HATFA rates based on these simulations. This is due to the 24-month average rates in the first table not approaching the HATFA corridor rates in the second table. Because the 5th to 95th percentile interval around each projected 2017 plan year HATFA rate is narrow, using the midpoint rates in projecting 2017 liabilities will result in a good estimate of the 2017 liability to be used for minimum funding purposes.

However, for 2018 the 5th to 95th percentile interval around the midpoint HATFA rate widens, especially going from the 50th percentile to the 95th percentile. This increase is due to the projected 24-month average being greater than the low-end HATFA corridor rate. The likelihood of the 24-month average rate falling inside the HATFA corridor increases in the next several plan years as the HATFA corridor widens to 70% to 130% of the 25-year average. Therefore it becomes harder trying to predict plan year segment rates starting in 2018.

2014 annual funding notice: Changes you need to know

Moliterno-MariaThe Highway and Transportation Funding Act of 2014 (HATFA) modified some of the content to be included on the 2014 annual funding notice (AFN) for single-employer defined benefit (DB) plans. Pension law requires employers that sponsor defined benefit plans to share certain financial information about the plan‘s funded status with plan participants via the AFN. Because the AFN due date is approaching for 2014 calendar-year plans, actuaries and plan sponsors should be aware of the necessary changes. The U.S. Department of Labor issued Field Assistance Bulletin (FAB) 2015-01 addressing updates to the 2014 AFN to reflect the application of HATFA.

In general, the AFN must be distributed to pension plan participants 120 days after the end of the plan year. Therefore, for calendar-year plans, the AFN must be distributed by April 30.

If a plan sponsor did not opt out of HATFA for plan year 2013 (“opt out” refers to the selection of the interest rate used to calculate the plan’s funding target) and had previously issued a 2013 AFN without reflecting HATFA, the 2013 AFN does not need to be revised or reissued to reflect the updates addressed in FAB 2015-01. However, the plan year 2013 results reflecting HATFA will need to be disclosed on the 2014 AFN.

Throughout the AFN, any references to Moving Ahead for Progress in the 21st Century Act (MAP-21) interest rates must refer to interest rates as amended by HATFA. A temporary supplement section was added to the 2012 AFN to disclose the effect of the change that is due to the MAP-21. Prior to HATFA, the temporary supplement was only required for applicable plan years beginning before January 1, 2015. Subsequent to HATFA, this temporary supplement is required for applicable plan years beginning before January 1, 2020.

An applicable plan year is defined as any plan year within the period in which the following three requirements are met:

1. The funding target under adjusted interest rates is less than 95% of the funding target without regard to adjusted interest rates.
2. The plan’s funding shortfall determined without regard to adjusted interest rates is greater than $500,000.
3. The plan had 50 or more participants on any day during the preceding plan year.

Previously, the first two items above were calculated using MAP-21 interest rates. Subsequent to HATFA, these same calculations are determined using HATFA interest rates. The wording on the supplement section of the AFN has replaced any references to MAP-21 rates with “adjusted interest rates.”

Prior to HATFA, if the value of plan assets was determined without regard to the MAP-21 interest rates, the AFN was to include a statement with the asset value and an explanation of how it differs from the value of plan assets used for funding purposes. Subsequent to HATFA, the Department of Labor rescinded this requirement after recognizing that it may result in complex requirements.
While most of the changes required by FAB 2015-01 are modest, they will still need to be reflected in the 2014 AFN. Be sure to update your 2014 AFN accordingly.

Top Milliman blog posts in 2014

Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.

20. Mike Williams and Stephanie Noonan’s blog, “Four things employers should know when evaluating private health exchanges,” can help employers determine whether a PHE makes sense for them.

19. Kevin Skow discusses savings tools that can help employees prepare for retirement in his blog “Retirement readiness: How long will you live in retirement? Want to bet on it?

18. The Benefits Alert entitled “Revised mortality assumptions issued for pension plans,” published by Milliman’s Employee Benefit Research Group, provides pension plan sponsors actuarial perspective on the Society of Actuaries’ revised mortality tables.

17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.

16. Milliman’s infographic “The boomerang generation’s retirement planning” features 12 tips Millennials should consider when developing their retirement strategy.

15. “Young uninsureds ask, ‘Do I feel lucky?’” examines the dilemma young consumers face when deciding to purchase insurance on the health exchange or go uninsured.

14. Last year’s #1 blog, “Retiring early under ACA: An unexpected outcome for employers?,” is still going strong. The blog authored by Jeff Bradley discusses the impact that the Patient Protection and Affordable Care Act could have on early retirees.

13. Genny Sedgwick’s “Fee leveling in DC plans: Disclosure is just the beginning” blog also made our list for the second consecutive year. Genny explains how different fee assessment methodologies, when used with a strategy to normalize revenue sharing among participant accounts, can significantly modify the impact of plan fees in participant accounts.

12. Doug Conkel discusses how the Supreme Court’s decision to rule on Tibble vs. Edison may impact defined contribution plans in his blog “Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

11. In her blog “Retirement plan leakage and retirement readiness,” Kara Tedesco discusses some problems created by the outflow of retirement savings. She also provides perspective on how employers can help employees keep money in their plans.

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HATFA-14 provides opportunities to reduce 2013 and/or 2014 cash contributions and 2014 PBGC premiums

Herman-TimThe recently enacted Highway and Transportation Funding Act of 2014 (HATFA-14) provides opportunities for plan sponsors to reduce cash contributions and Pension Benefit Guaranty Corporation (PBGC) premiums. For the approaches that involve contributions for the 2013 plan year, prompt action is needed to ensure the applicable funding requirements are satisfied. For calendar year plans, the final date to designate cash contributions and/or add excess contributions to the prefunding balance for the 2013 plan year is September 15, 2014.

HATFA-14 opportunities
1. Reduce cash contributions required for the 2013 plan year.
• Plan sponsors may optionally revise the 2013 actuarial valuation (absent an election to opt out of the HATFA-14 relief for 2013).
• With the use of the higher interest rates for the cash funding valuation, the minimum required contribution may be lower.

2. Reduce cash contributions required for the 2013 and 2014 plan years.
• Plan sponsors may optionally revise the 2013 actuarial valuation (absent an election to opt out of the HATFA-14 relief for 2013).
• Plan sponsors are required to revise the 2014 actuarial valuation.
• With the use of the higher interest rates for the cash funding valuations, the total minimum required contributions (combined 2013 and 2014 plan years) may be lower.

3. Reduce 2014 PBGC variable rate premiums.
• Revise the 2013 actuarial valuation to reduce the minimum funding requirements for the 2013 plan year.
• Revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year.
• Confirm that contributions are sufficient to satisfy both 2013 and 2014 minimum funding requirements.
• Designate some or all of the cash contributions previously used for the 2014 plan year as receivable contributions for the 2013 plan year.
• This reduces the unfunded liability for PBGC variable rate premium.

4. Manage credit balances for 2013 and 2014 plan years.
• Revise the 2013 actuarial valuation to reduce the minimum funding requirements for the 2013 plan year.
• Revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year.
• Confirm that contributions are sufficient to satisfy both 2013 and 2014 minimum funding requirements.
• Create and use credit balances to optimize the plan sponsor’s use of cash.

Some plan sponsors may decide forgo the opportunities provided by HATFA-14. One example is a plan sponsor with planned cash contributions to reach a specified funding threshold. These plan sponsors will still need to revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year (required). However, they may elect to opt out of the HATFA-14 relief for 2013 and satisfy 2013 plan year minimum funding requirements by making contributions based on the 2013 actuarial valuation results prepared under the Moving Ahead for Progress in the 21st Century Act (MAP-21) rates.

Cash savings opportunities under HATFA-14 will vary by a plan’s funded status, amount of credit balances available, etc. Also, different plan sponsors will have different goals and objectives regarding cash funding to the pension plan. Your Milliman consultant can help you review the opportunities that are available and decide on a course of action that is appropriate for your situation.

Google+ Hangout: Pension Funding Index (August 2014) and the implications of HATFA

The funded status of the 100 largest corporate defined benefit pension plans decreased by $5 billion during July as measured by the Milliman 100 Pension Funding Index (PFI). The deficit rose from $252 billion to $257 billion at the end of July, which was primarily due to declines in equity and fixed income returns during July. As of July 31, the funded ratio decreased from 85.3% to 85.0% since the end of June.

In this month’s PFI Hangout, Zorast Wadia discusses the study’s latest results and the pension smoothing provisions related to the Highway and Transportation Funding Act of 2014 (HATFA).