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Posts Tagged ‘Pensions’

HATFA requires immediate action on 2013 defined benefit plan valuations

August 6th, 2014 No comments

President Obama is expected to sign into law the recently passed Highway and Transportation Funding Act (HATFA). As enacted, single-employer and multiemployer defined benefit pension plan sponsors will see temporary reductions in minimum required contributions and may be able to avoid benefit restrictions. Because the new law as written applies retroactively to the 2013 plan year (absent an election to opt out), affected plan sponsors will have to make decisions soon, ideally equipped with yet-to-be published technical guidance from the Internal Revenue Service (IRS).

At a minimum, plan sponsors will need to quickly instruct their plan actuaries to redo the 2013 actuarial valuation calculations or formally elect to opt out.

In general, the new law modifies the 2012 Moving Ahead for Progress in the 21st Century (MAP-21) Act interest-rate corridors used by affected sponsors to determine their minimum funding liabilities. HATFA maintains a narrower corridor than MAP-21 for the 2013 to 2017 plan years and then phases in a wider corridor over four years beginning in 2018. A plan sponsor may elect, in writing, to retain its use of the MAP-21 interest-rate corridor only for the 2013 plan year; starting in 2014, use of the HATFA corridors by all plan sponsors is required.

Plan sponsors face a number of time-sensitive decisions and actions as a result of HATFA’s enactment. For example, absent an election to opt out, the narrower 2013 plan year interest-rate corridor will require a revised actuarial valuation. Plan sponsors will also have to revise their disclosures to reflect the HATFA changes in the next annual funding notices. As the HATFA change temporarily reduces the amount a sponsor must contribute and the tax deductions for those contributions, the employers’ taxable income could increase. And longer term, required pension plan contributions should increase after the temporary “smoothing” provision expires, depending on corporate bond interest rates and other factors at that time.

The HATFA provision does not affect multiemployer defined benefit pension plans nor Pension Benefit Guaranty Corporation (PBGC) premiums. The pension-related provisions in HATFA also include changes for certain plan sponsors in bankruptcy, and companies subject to the rules of the Cost Accounting Standards Board (CASB) will have to adjust their CASB recovery calculations. Cooperative/small employer charity plans will need to recalculate their plans’ full funding limits.

For additional information about HATFA’s pension provisions and assistance with exploring the short- and long-term pension funding options, please contact your Milliman consultant.

Top 10 Milliman blogs items for 2013

December 19th, 2013 No comments

Milliman publishes blog content addressing complex issues with broad social importance. Our actuaries and consultants offer their perspective on healthcare, retirement plans, regulatory compliance, and more. The list below highlights Milliman’s top 10 blogs in 2013 based on total pageviews:

10. In their blog “Five keys to writing a successful qualified health plan application,” Maureen Tressel Lewis and Bonnie Benson highlight several best practices insurers should consider when submitting a qualified health plan application to the Health Insurance Marketplace.

9. “Understanding ACA’s subsidies and their effect on premiums” offers perspective into the relationship between healthcare premiums and federal subsidies for low-income individuals.

8. Funding for future Consumer Operated and Oriented Plans(CO-OPs) was eliminated as a result of the fiscal deal that was signed in December 2012. Tom Snook takes a look at how the deal affects CO-OPs in his blog “CO-OPs: An endangered species?

7. Robert Schmidt discusses why the methodology used to determine COBRA premium rates is essential in his blog “The growing importance of COBRA rate methodologies.”

6. A second blog by Maureen Tressel Lewis and Mary Schlaphoff entitled “Five critical success factors for participation in exchange markets” highlights tactics that insurers offering qualified health plans may benefit from implementing.

5. “Pension plans: Key dates and deadlines for 2013” offers Milliman’s three retirement plan calendars (defined benefit, defined contribution, and multiemployer) with key administrative dates and deadlines throughout the year.

4. In her blog “Fee leveling in DC plans: Disclosure is just the beginning,” Genny Sedgwick explains how investment expenses and revenue sharing affect the fees paid by defined contribution plan participants.

3. Maureen Tressel Lewis and Mary Schlaphoff’s blog “Five common gaps for exchange readiness” describes items issuers of qualified health plans have to resolve before their plans can be sold on the Health Insurance Marketplace.

2. In the lead up to implementation of the Patient Protection and Affordable Care Act (ACA), debate often centered on how the law would affect healthcare premiums. Our “ACA premium rate reading list” offers perspective on how rates may be affected.

1. In his blog “Retiring early under ACA: An unexpected outcome for employers?,” Jeff Bradley discusses the impact that the ACA could have on both early retirees and plan sponsors.

This article was first publish at Milliman Insight.

How a website for pension employees can help employers

November 12th, 2013 No comments

Hart-KevinHaving a website for pension employees isn’t just good for the employees, it’s also good for employers. A website for pension employees can save an employer time and can help communicate retirement benefits. And in today’s world, some employees will be more comfortable doing as much as possible online.

Communicating directly with employees through a participant website can often be a time-saver. A participant website can allow employees to send emails to the employer. Certain self-service functions can also be made available on the participant website. This would include allowing employees to change their beneficiaries, or current addresses, or even begin termination/retirement processes, all online. Another self-service possibility on the participant website is allowing retirees to change their direct deposits or tax withholding information online. This is an always growing area and, as time goes on, more and more self-service functions will be made available to employees.

A website for pension employees can also save an employer time by making certain documents available there. Frequently requested documents can be made available for download, including summary plan descriptions, annual funding notices, beneficiary designation forms, frequently asked questions, and more.

Benefit calculations can be posted directly to an employee’s portion of the website. Periodic benefit statements can also be posted online and are thus always available to employees. This gives employees an opportunity to see past statements and how their pension benefit is growing. Any types of calculations can be posted on the website and only made available to targeted employees. This includes final termination or retirement paperwork that the employee must fill out.

But perhaps the biggest benefit of a website for pension employees is allowing employees to project their retirement benefits and become comfortable with their retirement incomes, using online tools to run projections at different termination and retirement dates. Employees can see their accrued benefit as well as what their benefits would be if they stayed employed with the employer up to their normal retirement dates.

The website can also estimate Social Security benefits at various beginning dates and can even include the defined contribution (DC) benefits (401[k], 403[b], etc.) offered through an employer. Enabling employees to combine all of their retirement benefits and other retirement income, as well as their spouses’ retirement income, can give employees a picture of their total retirement income. Employees can run various “what-if” scenarios to see how their retirement choices might affect future benefits. A participant website is one way to show employees the value of total retirement benefits packages.

If you are an employer who would be interested in creating or enhancing a website for your pension employees, then now might be a good time to investigate further.

School’s out for summer

June 20th, 2013 No comments

I have two kids and they just started summer vacation. Ahhh, the sweet freedom of youth. Months of swimming, fishing, bike riding, and downloading ridiculous apps.

My 12-year-old son noticed that I was still doing my usual evening prep to get everything ready for work the next morning and said, “No summer vacation for you, Dad.” I nodded. “Don’t worry,” he continued, “You’ll be laughing at me when you’re retired.”

Wow. Pension humor at age 12. He’s a chip off the old block, my son.

I only hope he’s right. But I’m sure not laughing yet. I’m 46 and, although I’m saving for retirement, I also plan to live a lot longer, which means I’ve got to work longer to save up for it. In addition, although I’ve had good health so far (and I try to hit the gym four or five times a week), there’s no guarantee that it will last.

People are living longer. On average, a 65-year-old can expect to live another 19 years, but it’s becoming more and more common to cross the century mark. People are also dying longer. Instead of dying quickly from heart attacks, we’re facing long battles with cancer or Alzheimer’s, and along the way we’re having hip replacements and knee replacements. With healthcare costs already straining company budgets, I have to believe that some of my nest egg will be paying for my medical needs. (Check out the Milliman Medical Index for some sobering data on how the average family of four spends more on medical premiums than they do on groceries.)

In the meantime, my kids will need college educations and the tuition trend is looking a lot like the healthcare trend.

It’s a good thing I love my job (Thank you Mr. Milliman!) because I’ll probably be at it for a while. And that’s really the bright side. It’s a challenging time to be in the benefits industry. The global financial crisis has really put the squeeze on a lot of pension plans and our clients need creative solutions for managing costs while staying compliant. Furthermore, I think the pendulum may be about to swing back in favor of defined benefit (DB) plans because people now realize that 401(k) plans alone can’t provide a stable, secure retirement. But the defined benefit plans of tomorrow will need less volatility and may have later retirement ages.

So, someday in the distant future, I’m sure I’ll be able to laugh at my son when I’m retired and he’s a member of the workforce, but I can wait a while and find other things to laugh about along the way.

New mortality research indicates Americans living longer than expected

February 25th, 2013 No comments

In September 2012, the Society of Actuaries (SOA) released the results of research indicating that recent U.S. mortality improvements have outpaced expectations. The “Mortality Improvement Scale BB” report was authored by the Retirement Plans Experience Committee (RPEC), a subcommittee of the SOA whose primary directive is to research mortality experience among U.S. retirement plans. The RPEC also publishes the mortality tables and mortality improvement scales that are in frequent use for actuarial valuations of pension plans in both the public and private sectors.

Currently, the RPEC’s most recently published mortality tables in the United States are the RP-2000 tables. These tables contain expected rates of mortality by age, and are mandated by the IRS for use in U.S. corporate pension valuations. The RPEC had also previously published Scale AA, a scale of mortality improvements intended for use with base mortality tables to reflect the expectation that mortality is improving over time. However, the most recent research shows that even greater actual mortality improvement has been occurring than was predicted by Scale AA.

Additionally, the RPEC research has revealed that age alone may not be the best predictor of mortality improvement; some birth groups may experience rates of improvement that differ from other birth groups, or entire populations may experience a boost in longevity that is due to medical achievements such as antibiotics, regardless of age. For reasons such as these, the RPEC believes the best predictors of mortality improvement may be tied to both age and calendar year. This would create the need for a two-dimensional table of mortality improvement rates, which some current actuarial software may not be able to utilize without modification.

To that end, the RPEC has released an interim improvement scale, known as Scale BB. Scale BB, although not itself two-dimensional, incorporates information from the fully two-dimensional rates developed by the RPEC. It also reflects the stronger improvement patterns seen in recent years. Although the impact of using Scale BB in actuarial valuations will vary by pension plan based on plan provisions, maturity, and other factors, Scale BB is expected to result in higher liabilities as it reflects increasingly lengthy lifetimes for benefit recipients. The RPEC study estimates that switching from Scale AA to Scale BB might increase liabilities between 2% and 4%, based on some sample plan analysis.

There is ongoing debate in the actuarial community as to the use of Scale BB, particularly centering around some assumptions used in the creation of that scale. The RPEC anticipates the release of final mortality tables and a final improvement scale by the end of 2013 or early 2014. Therefore, whether or not the use of Scale BB becomes widespread, increases in mortality improvement will likely be reflected within the next several years for many pension plans.

To read the entire SOA report, click here. For more information on actuarial mortality assumptions, click here.

Historic low interest rates widen pension funding deficit by $74 billion in 2012

January 7th, 2013 No comments

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest corporate defined benefit pension plans. In December, these pensions experienced a $54 billion increase in funded status based on a $46 billion decrease in the pension benefit obligation (PBO) and a $8 billion increase in assets. The $54 billion improvement in December follows a $34 billion improvement in November, but it would still take many more months of improvement to make up for a year of ballooning pension deficit. At year end, the deficit of $412 billion is $74 billion higher than it was when 2011 ended.

 

It was a good year on the asset side, with these pensions experiencing a $90 billion gain. But it was a rough year on the liability side, with interest rates driving a $164 billion increase in the pension benefit obligation. People may be getting tired of hearing me saying it but interest rates have been the story for the last four years and that’s not going to change in 2013. 

In December, the discount rate used to calculate pension liabilities increased from 4.05% to 4.18%, decreasing the PBO from $1.794 trillion to $1.748 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.328 trillion to $1.336 trillion.

Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.18% were to be maintained throughout 2013 and 2014, these pensions would improve the pension funded ratio from 76.4% to 81.0% by the end of 2013 and to 85.7% by the end of 2014.

These year-end figures are only tentative, and will be revisited when the 2013 Milliman Pension Funding Study is completed in March. De-risking activities made by some of these companies will probably lower asset and liability figures, which we expect to have a slightly negative impact on the overall funded status of these plans.

Moody’s proposal for pension liabilities could affect credit ratings of local governments

January 7th, 2013 No comments

In July 2012, Moody’s released to subscribers a “request for comment” draft of proposed adjustments to be made by Moody’s to the pension data reported by U.S. state and local governments. These adjustments, if adopted, could influence local government credit ratings. Moody’s has indicated in this draft report that state credit ratings might not be impacted by the changes; however, the proposed adjustments would still be made and considered for state plans.

The proposal would involve several key changes to be made to the reported liabilities of state and local government pension plans. These would include adjusting liabilities to reflect a 5.50% discount rate using a uniform assumed liability duration of 13 (an assumption which would result in an approximate 13% increase in liabilities for every decrease in discount rate of 1%); using market value of assets rather than any smoothed value reported by the plan; amortizing any resulting unfunded actuarial accrued liability over a 17-year period on a level-dollar basis; and allocating liabilities for cost-sharing plans according to proportionate share of total plan contributions.

Moody’s has stated that these adjustments, if adopted, “would likely result in rating actions for those local governments where the adjusted liability is outsized for the rating category,” and where the plan has not shown the ability to increase funding or otherwise respond to shortfalls.

However, some actuaries and plan sponsors have voiced concerns that these adjustments may be too broad to appreciably improve metrics for individual plans. In particular, using a duration of 13 to adjust liabilities may cause some very mature plans to appear more sensitive to changes in the discount rate than they actually are, while some younger plans may in fact be more sensitive to changes in discount rate than a duration of 13 would predict. Additionally, amortizing the resulting unfunded actuarial accrued liability (based on market value of assets) over a 17-year period on a level-dollar basis is likely to show significantly higher contribution amounts in early years of the unfunded liability amortization, because most systems use a level percentage of pay methodology, which results in increasing contribution dollars over time.

The deadline for comment on the Moody’s proposal was August 31, 2012; however, no final Rating Implementation Guideline has yet been published, so it remains to be seen to what extent any final guideline will mirror the draft proposal. Follow Moody’s here.

John Ehrhardt discusses pension funding with Fox Business

January 4th, 2013 No comments

John Ehrhardt today discussed pension funding deficits, interest rates, and pension contributions on Closing Bell. Here is the video:

 

Australia exemplifies a changing world of pension systems

January 2nd, 2013 No comments

Aging workforces, longer lifespans, and deteriorating global economies have placed the future of retirement systems at risk. In this issue of Benefits Perspectives, Wade Matterson spotlights Australia’s superannuation retirement system as he examines reasons government intervention in pension policies are anticipated moving forward.

Here is an excerpt from his article:

Private industry is already in the early stages of evolving to address some of these problems. The market participants are reacting, driven by the need to provide better outcomes for workers and retirees. Whilst embryonic in many cases, examples of these activities include:

Greater segmentation of members and their needs, e.g., the trend to review one-size-fits-all investment models (or default funds) in place of developing investment strategies that are more focused on individual objectives and that take a holistic view of members financial affairs.

Offerings that target these segments, including product, advice and distribution, including the development of lifecycle investment options, personalized overlays and other longevity products (e.g., variable annuities), as well as emerging advice models that range from single-issue advice to intrafund and holistic approaches.

New models emerging such as self-managed and direct investment alternatives. Whilst this trend has arguably come about in part because of the perceived failings of large institutional pension plans, the trend towards greater control and individual tailoring has been established and many funds now appear to be developing the capability to offer similar solutions to the membership.

Improved efficiency, competition, and choice in the retail provision of retirement benefits could further lessen dependency on governments by creating a more educated and informed member. Armed with knowledge about saving, investing, spending and other retirement planning information, members should experience improved decision-making and outcomes (i.e., mitigate behavioral risks that lead to mismanagement of pension assets).

International Foundation of Employee Benefit Plans 2012 conference survey

December 12th, 2012 No comments

Milliman organized an Opinion Survey at the 58th U.S. Annual Employee Benefits Conference in San Diego. Conference attendees were asked several questions regarding pensions and retirement; 459 surveys were completed.

The first question we asked was, “Should Congress let the current pension law, the Pension Protection Act (PPA), sunset in 2014 or renew it?” Over 41% of respondents think that PPA is working and that Congress should renew it, although 22% think that the old pension regulations were better.

 

We were also interested to learn if attendees thought that the new required fee disclosures made their defined contribution (DC) plan costs more transparent. Thirty percent of respondents are not certain that the new fee disclosure rules have made a difference. However, about 29% of survey participants answered, “Yes, fees are clearly understood and fair.”

When asked, “Will the Affordable Care Act help your Health & Welfare Plan save money over time?” 33% of respondents indicated healthcare reform would probably help their plan save money while 32% did not.

Finally, regarding the recent uptick in withdrawal liability inquiries, approximately 35% of participants attributed the increase to “The Great Recession.” However, 26% thought the rise in such inquiries were due to lower funding percentages.

If you have any questions about employee benefit plans, please contact a Milliman consultant.