Tag Archives: Mark Olleman

Variable annuity pension plan reading list

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Variable annuity pension plans (VAPPs) are hybrid retirement plans that provide employers an alternative design to the traditional defined benefit (DB) plan and the defined contribution (DC) plan. VAPPs can stabilize contributions for sponsors while offering participants lifelong income. This reading list highlights various information related to VAPPs.

• “Retirement risks side-by-side: DB vs DC vs VAPP”
In this video blog, I discuss the retirement risk allocation between a plan sponsor and the plan’s participants in a variable annuity pension plan (VAPP) structure compared with risk analyses associated with traditional defined benefit plans and defined contribution plans. I also explain how a VAPP can reduce inflation, portability, and interest rate risks.

• “Benefits side by side: DC vs DB vs VAPP”
VAPPs provide secure, lifelong, inflation-protected retirement benefits. VAPPs combine the best of what traditional DB plans do regarding longevity protection and lifelong income and what DC plans do to combat inflation. In this second video presentation, I explain the advantages for retirees of VAPPs compared to more traditional plan structures.

• “Plan funding side by side: Traditional DB and VAPP”
VAPPs provide lifelong inflation-protected benefits to participants. VAPPs can also stabilize plan contributions for employers. In this video presentation, I discuss how funding a VAPP compares with funding a traditional pension plan. The presentation also touches on how Milliman helps plan sponsors stabilize benefits for retirees through reserves.

• “Employee communication: Transition to a VAPP
Some employers have considered switching their current retirement plan to a VAPP. Communicating the change in retirement benefits can be a challenge for plan sponsors. This blog, written by Milliman’s Heidi tenBroek, features a video that explains to employees how a VAPP works, how it affects their benefits, and why it is a stable retirement solution for them and their employer.

• “Milliman infographic: Variable annuity pension plan
The VAPP design combines features from traditional DB plans along with features from DC plans. This infographic illustrates specific retirement plan sponsor needs that VAPPs help address.

• “VAPPs: Coming soon to a retirement plan near you?
In this blog, Milliman consultant Grant Camp summarizes the DB plan and DC plan features of VAPPs.

• “Milliman Hangout: Variable annuity pension plans (VAPPs)”
Camp and I talk about VAPP features in this video. They also discuss the value VAPPs offer sponsors and participants.

“Making the case for variable annuity pension plans (VAPPs)”
VAPP retirement benefits increase or decrease depending on whether a plan’s investments return more or less than the established “hurdle rate.” A benefit stabilization strategy preserves funding stability and diminishes benefit declines. Camp and I discuss the strategy in this article.

“Making the case for variable annuity pension plans (VAPPs): Basic VAPP benefits and design strengths”
This article provides examples of how a retiree’s basic VAPP benefits would change over different historical periods. The article also details the strengths and weaknesses of the VAPP design.

“Making the case for variable annuity pension plans (VAPPs): Stabilized VAPP benefits”
In this article, Camp, Ladd Preppernau, and I discuss the stabilized VAPP model. The design involves building a reserve, spending the reserve in down markets to prevent benefit decreases, and improving benefits if the reserve is larger than is required to prevent benefit decreases.

Making the case for variable annuity pension plans (VAPPs): Shared retirement risks: How VAPPs stack up
There are four main risks associated with retirement plans: investment risk, interest rate risk, inflation risk, and longevity risk. This article, authored by Camp, Preppernau, and I provides perspective on how VAPPs address these risks.

“A balanced approach to retirement risk”
VAPPs address several sponsor concerns like funding and accounting volatility. The design also helps alleviate participant concerns related to money management and inflation. Milliman’s Camp offers more perspective in this blog.

“Variable annuity plans may benefit employers and employees”
In this blog, Milliman’s Ryan Hart provides a chart comparing and contrasting VAPPs alongside DC plans and traditional DB plans.

“Variable annuity pension plans: An emerging retirement plan design”’
In this article, Mark Olleman and I provide historical scenarios of how retirees’ benefits would vary over time under a VAPP structure.

“Variable Annuities: A retirement plan design with less contribution volatility”
Multiemployer plan trustees seeking sustainable ways to provide participants with lifelong benefits that allow for more predictable contributions may want to consider the VAPP design. This paper by Olleman, Preppernau, and I explains the advantages that VAPPs offer single and multiemployers and their employees.

Hybrid retirement plans provides sponsors with options

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Hybrid retirement plans are becoming more popular among employers seeking to offer the best features of both traditional defined benefit and defined contribution plans. A recent Employee Benefits Adviser article (subscription required) highlights variations of these hybrid plans and identifies some public and private sector sponsors that have shown interest in adopting them.

Here is an excerpt featuring some perspective from Milliman’s Mark Olleman and Kelly Coffing:

“I think we are going to see more hybrid arrangements and fewer defined contribution and traditional defined benefit plans [in the future],” says Mark Olleman, principal and consulting actuary at Milliman, Inc. in Seattle. “I think we really need more plans to provide people with a lifelong income, without providing employers unpredictable contributions.”

…Wisconsin’s plan looks more like a variable annuity pension plan. [Retiree benefits are based on a conservative assumption of] a 5% return. If the plan returns better than 5% over the long term, retirees get dividends. If it returns below 5%, the dividends will be taken away, Olleman says. Retirees receive a minimum amount [of their original benefit] regardless of how the market performs.

The big difference between public sector and private sector plans is that public sector plans need to get permission from the legislature to make changes, he said. Both sectors have shown an interest in hybrid options.

Kelly Coffing, a principal and consulting actuary for Milliman who works more closely with private sector employers, says that variable annuity pension plans have been around for a while but have not been popular with retirees. The reason? They don’t like it when their benefits go down, she said. In a VAPP, the monthly benefits move up and down based on the performance of the plan. If the assets go up, the benefits go up. If the assets go down, the benefits go down.

Despite the volatility, these types of plans always stay funded and have very predictable, rational employer costs, Coffing says. They also offer longevity pooling and inflation protection, which is something participants don’t get in a defined contribution plan.

…Milliman has attempted to smooth out some of that volatility for retirees in its latest version of the VAPP [that they call the stabilized VAPP].

“In years where returns are high, we don’t give the whole upside to participants. We [cap] the increases [to build] a reserve. When the market goes down, we can [use the reserve to] shore up the benefit to the high water mark,” she says. This way, participants don’t see a roller coaster of ups and downs in their retirement [benefits].

…Milliman’s experts say they hope the variable annuity pension plan will gain in popularity now that [final hybrid retirement regulations issued September 19, 2004 have confirmed that the stabilized VAPP is an acceptable plan design.]

To learn more about how VAPPs can provide lifelong retirement benefits, read Olleman and Kelly’s article entitled “Variable annuity pension plans: An emerging retirement plan design.”

Can variable annuity pensions offer more retirement security?

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Senator Tom Harkin proposed the Universal, Secure, and Adaptable (USA) Retirement Funds Act intending to improve retirement security for individuals. In their article “Variable annuity pension plans: An emerging retirement plan design,” Milliman’s Kelly Coffing and Mark Olleman discuss how the variable annuity pension plan (VAPP) can address four principles Harkin proposes for reform.

Here’s an excerpt from the article:

The VAPP design responds to Harkin’s four principles as follows:

• Although not universal, the reallocation of risk allows more employers to maintain the “three-legged stool,” which includes pensions.
• By changing the focus from a “guaranteed” dollar benefit to a “lifelong” benefit, more people are able to have the certainty of a reliable stream of lifelong income without the fear of outliving their assets.
• Retirement risk is shared more evenly among participants. Risk is shifted from employers and active participants to all participants including retirees.
• Because retirement assets are pooled and professionally managed, larger benefits can be provided per dollar contributed.

In addition, some level of inflation protection may be provided.

So how exactly does this work? Figure 1 provides an example. The participant is hired on January 1, 2002 and enrolled in a VAPP with a 4% hurdle rate. For simplicity, the illustration shows the participant earning $30 per month of benefit each year, but benefits could be based on a percent of contributions or a percent of each year’s pay (a career average formula). The illustration uses actual historical returns based on a portfolio that is invested 60% in large company stocks (S&P 500) and 40% in long-term high-grade corporate bonds.

Figure 1 shows that at January 1, 2003 the participant has earned a benefit of $30 during 2002. The $30 earned in 2002 is adjusted at the end of 2003 for the trust’s investment return of 19.3% in 2003. The adjustment is 119.3%/104.0% = 114.7%, which increased the $30 to $34.41. Therefore, at January 1, 2004 the participant’s total accrued benefit is $34.41 plus another $30 earned in 2003, for a total of $64.41.

After 11 years, at January 1, 2013 the benefit accrued in 2002 has grown to $43.37, the benefit accrued in 2003 has grown to $37.82 and the total of the benefits accrued in all years has grown to $395.33. Although all benefits decreased by 21.8% after 2008, by January 1, 2013 the benefits earned in all years are larger than the original $30 accruals.

Figure 1 - VAPP benefit accrued example

Milliman consultant Grant Camp describes VAPP benefit features that can provide security for both retirement plan sponsors and participants in his blog “A balanced approach to retirement risk.” Ryan Hart also highlights the advantages that VAAPs may offer employers and employees in this blog.

Multiemployer plans explore variable annuity plans for less contribution volatility

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Some multiemployer pension plans have had their funded status deteriorate because of the difficult and volatile investment markets of recent years, leading to either increased contributions or reduced benefits—or in some cases both. For some multiemployer plans, this has made collective bargaining more difficult, reduced participant pay increases, and caused some employers to struggle to stay competitive. Multiemployer plan trustees may be looking for alternative, sustainable ways to provide participants with lifelong benefits that allow for more predictable contributions.

One alternative for multiemployer trustees to consider is changing the pension plan so that future accruals are paid through a variable annuity plan (sometimes referred to as adjustable pension plans). Much like changing to a defined contribution (DC) plan, changing to a variable annuity plan shifts the plan’s investment risk for future benefit accruals to the participants. A new Milliman white paper, “Variable annuities: A retirement plan design with less contribution volatility,” describes variable annuity plans and some advantages they may have over DC plans.

To download the entire paper, click here.

Public DB plans get some love

Here’s some good news about defined benefit (DB) plans: Public employees, in overwhelming numbers, are showing that they understand and appreciate the value of their defined benefit pension plans.

We know this is true because we studied the data from seven statewide retirement systems that offer employees the choice between a DB and a defined contribution (DC) plan such as a 401(k). The systems included in the study were Colorado Public Employees’ Retirement Association, Florida Retirement System, Montana Public Employees Retirement Association, North Dakota Public Employees Retirement System, Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, and South Carolina Retirement Systems.

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The choice of public employees

Pensions & Investments picks up on the release of the new report on public retirement plan preferences, “Decisions, Decisions.” Here is an excerpt from P&I:

Public-sector employees overwhelmingly choose defined benefit plans over defined contribution plans when given a choice, according to a report by the National Institute on Retirement Security and Milliman.

In six states that offer new employees a choice between DB and DC plans, the report found that DB was chosen by most employees, ranging from 75% to 98% among the state plans.

“If you had an election with 75% of the vote (for a candidate), it would be well past a landslide,” Mark Olleman, a consulting actuary and principal at Milliman, said in a telephone interview. Mr. Olleman is co-author of the report, which was issued Thursday, with Ilana Boivie, an NIRS economist.

Statewide DC plans have lower investment returns than DB plans because DB assets are pooled and professionally managed, according to the report.

“Some states have considered moving from a DB-only to a DC-only structure in an attempt to address an unfunded liability,” the report said. “Making this shift, however, does nothing to close any funding shortfalls and can actually increase retirement costs.”

Reuters casts the findings in an even broader context, comparing public and private employer approaches to retirement:

To fix their persistent pension problems, some U.S. states are looking to reshape their retirement plans to resemble those in the private sector, but they may find may employees resistant and the savings elusive.

For more perspective, check out coverage from Plan SponsorAdvisorOne, Institutional Investor, and BenefitsPro. And you might also might appreciate the article from Investment News with our favorite headline so far: “This just in–DB plans rock.”