With the release of IRS Notice 2012-61, plan sponsors of single-employer defined benefit plans were provided with just-in-time guidance to meet the September 14 deadline for plan year 2011 contributions and were granted certain safe harbor flexibility rules to finalize the certification of plan year 2012 funding ratios.

The IRS notice is one of several pieces of regulatory guidance resulting from enactment of the Moving Ahead for Progress in the 21st Century Act (MAP-21). These include IRS Notice 2012-55 (on the new interest rates used to calculate annual contributions; see Benefits Alert 12-5) and Technical Update 12-2 (on the law’s effect on annual and actuarial reporting under ERISA section 4010) from the Pension Benefit Guaranty Corporation (PBGC). The MAP-21 provisions were designed to reduce contribution volatility caused by low interest rates under the pension funding rules.

Key issues addressed by Notice 2012-61 include:

• In most cases, plans that offer participants the option to choose a one-time lump-sum payment may use the MAP-21 interest rates to calculate the actuarial present value of an underlying annuity when projecting future lump-sum payments in determining plan liabilities under the funding rules. However, the interest rates used to determine the lump sums actually paid to participants are not changed.
• Plan sponsors may choose to recharacterize certain plan year 2011 contributions made during 2012 as being made for plan year 2012, as well as reverse certain credit balance “burns” and recharacterize contributions used to fund any plan amendments.
• The MAP-21 interest rates may be used to calculate the expected return on the actuarial value of assets for both the minimum required contribution and the tax-deductible contribution limit.
• The MAP-21 rates can be used for plan year 2012 calculations to determine if the plan is in at-risk status for plan year 2013.
• The MAP-21 interest rates also are used to determine any funding deficit for eligible charity plans and to amortize the funding deficits.
• The MAP-21 rates are permitted to be used as the interest crediting rate for cash balance and other statutory hybrid pension plans, at least before the 2014 plan year.

In the PBGC’s Technical Update 12-2, guidance is provided on the conditions under which the revised funding calculations may be used to assess whether a plan sponsor is required (under ERISA section 4010) to report a less-than-80% funded ratio to the PBGC.

For information about and application of the new guidance from the IRS or the PBGC, please contact your Milliman consultant.

This article in The Wall Street Journal (subscription required) takes a look at how life insurers have restructured variable annuities in recent years. Here is an excerpt from the story:

In a trend gathering momentum, the life insurers that sell these tax-advantaged vehicles for investing in funds are competing on the basis of investment choices. That’s what they did in the 1980s and 1990s, before launching an arms race of escalating promises of guaranteed-minimum lifetime income, even if underlying funds tanked.

That competition cost the industry dearly when markets slid in 2008 and early 2009, leading to price increases and less-generous features as insurers sought to repair their balance sheets. With the new offerings, insurers are drawing on the past but adding a twist: They are pitching variable annuities as a smart way to load up on alternative investments.

While many insurers did see losses in 2008 and 2009, those with sufficient hedging in place fared better. Milliman research indicates that hedging strategies saved insurers $40 billion in September and October of 2008.

The Milliman Managed Risk Strategy offers similar risk management techniques to pensions through hedging strategies that seek to maximize clients’ asset growth in bull markets while defending against losses in down markets.

For Milliman’s insight into the variable annuity industry, click here.

Two key actuarial assumptions that drive costs are the rate at which liabilities are discounted and the expected longevity of members who are receiving or are expected to receive benefits.

Our two-part PERiScope series explores recent trends and theories pertaining to the setting of these assumptions. The first part, Setting the discount rate for valuing pension liabilities, discusses the fundamental approaches to discount rate setting, recent changes in such rates among public pension plans, and how these rates comply with Governmental Accounting Standards Board (GASB) regulations.

Here’s an excerpt:

In compliance with GASB standards, the overwhelming majority of public pension funds base their discount rate on the expected investment returns of the fund. These rates are set through a combination of a model based on the capital market assumptions of investment advisors and a desire to take a long-term view. Assumptions have been declining in recent years and we expect this trend to continue as the rates implied by the capital market assumptions have dropped substantially. This will result in higher contributions in the short term. However, if the investment return assumption is not being reduced in accordance with the capital market assumptions, contributions in future years are likely to be higher than otherwise.

Download and read the entire article here.

With the struggling economy and the effects of a low interest rate environment on corporate pension plan’s balance sheets, plans with June 30 fiscal year ends could see a much different picture than a year ago. Many governmental plans and not-for-profits have a June 30 fiscal year end.

Making matters even more difficult for pension plans, Citigroup announced on June 26, 2012, that the downgrade by Moody’s in June 2012 of five financial institutions—JPMorgan Chase, Credit Suisse, Barclays, UBS, and Deutsche Bank—will affect the number of bonds in the universe when Citigroup releases the June 30 Citigroup Pension Liability Index. Citigroup indicated that if the five financial institutions were not included in the May 2012 index that the median discount rate would have dropped 20 basis points, from 4.34% to 4.14%.

Each month Milliman publishes its Pension Funding Index (PFI), which serves as a monthly update to its annual Pension Funding Study. As stated in the June 2012 PFI, the funded status deficit of the 100 largest corporate defined benefit plans was $357 billion. Reflecting a 20-basis-point decrease in discount rates, the funded status would drop from 78.0% to 75.1%, a change amounting to a massive $61 billion decrease in funded status.

This is certainly not good news for sponsors of defined benefit (DB) pension plans with a June 30 fiscal year end. Milliman is here to assist you with this matter. Please contact your Milliman consultant for more information.

Plan sponsors responsible for a calendar-year single-employer defined benefit plan will likely find this useful.

We’ve been tracking the funded status of corporate pensions for some time. A new article by Knowledge @ Wharton introduces an interesting comparison between today’s low funded status and the overfunded 1990s.

In a double whammy, record low interest rates have slowed the growth of pension assets in relation to promised payouts, causing companies to divert still more money into plans to maintain the funding requirements. The Federal Reserve’s November decision to buy $600 billion of U.S. bonds to stimulate the economy is expected to worsen the problem by further lowering interest rates.

These woes mark a dramatic turnaround from the 1990s when pension plans actually padded company profits since surplus funds can be counted as income. At the end of the last century, corporate defined benefit plans were 130% funded, according to Milliman, a Seattle, Washington-based actuarial consultant. Back in the 1990s, General Electric “made more money from their pension plan than from light bulbs,” quips John Ehrhardt, a coauthor of Milliman’s annual pension studies.

To put this pension funded status surplus in perspective, check out Figure 1.

The low funded ratio for American corporate pensions is just one aspect of the larger reevaluation of the retirement promise discussed in the article.