Pension reform reversals in Central and Eastern Europe

Central and Eastern Europe’s (CEE) experience with pension reform can illuminate some of the pitfalls of embracing systemic reforms too eagerly. Subsequent reversal of these reforms occurred some years later as governments found themselves increasingly under financial strain.

As the largest economy in CEE, the case of Poland provides a good example. In 1999, Poland enacted “public-to-private” systemic pension reforms of the then-existing pay-as-you-go (PAYG) state system. The reforms introduced private pensions and diverted a significant share of workers’ contributions away from public pensions towards these private plans.

In a dramatic move in 2014, however, the Polish government then reversed these changes, with “private-to-public” reforms that saw the government transfer the equivalent of US$40 billion at present exchange rates of bond assets that had been accumulated within the nascent private pension system to the public system. In 2016, the government announced a further reversal of the previous system.

To learn more about pension reforms in Central and Eastern Europe, read Dominic Clark’s article here.

February’s investment gains propel corporate pension funding ratio to 92.6%

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In February, these pensions experienced a $20 billion increase in funded status thanks to healthy investment gains and an increase in the benchmark corporate bond interest rates used to value pension liabilities. The market value of assets rose by $15 billion as a result of February’s robust investment gain of 1.24%. Pension liabilities also fell to $1.648 trillion at the end of the month, the result of a two basis point increase in the monthly discount rate. The PFI deficit has dropped by $45 billion in the first two months of 2019. The funding ratio of the Milliman 100 PFI rose from 91.4% at the end of January to 92.6% as of February 28.

“February’s investment gains continue to propel corporate pension funding in the right direction, adding to an already positive start to the year,” said Zorast Wadia, co-author of the Milliman 100 PFI. “While the gains of the past two months are good news for these pensions, we’ve still not fully recovered from the $70 billion hole created last December.”

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.58% by the end of 2019 and 5.18% by the end of 2020) and asset gains (10.8% annual returns), the funded ratio would climb to 105% by the end of 2019 and 121% by the end of 2020. Under a pessimistic forecast (3.58% discount rate at the end of 2019 and 2.98% by the end of 2020 and 2.8% annual returns), the funded ratio would decline to 87% by the end of 2019 and 81% by the end of 2020.

To view the complete Pension Funding Index, click here. To see the 2018 Milliman Pension Funding Study, click here.
To receive regular updates of Milliman’s pension funding analysis, contact us here.

IRS permits lump-sum window option for pension annuitants pending further study

The IRS has suspended its four-year regulatory project that was expected to limit a defined benefit (DB) retirement plan’s ability to offer retirees and beneficiaries a short-term opportunity for a lump sum in lieu of their annuity. Notice 2019-18, released on March 6, states the agency no longer intends to amend the required minimum distribution rules to prohibit lump-sum windows to current annuitants in a DB plan. The IRS, however, notes it will continue to study the issue of retiree lump-sum windows.

The IRS notice supersedes Notice 2015-49 (see Client Action Bulletin 15-8).

Until the IRS issues further guidance, the agency will not assert that a plan amendment providing for a retiree lump-sum window program results in a violation of the minimum distribution rules, but will continue to evaluate whether the plan, as amended, satisfies the other requirements (e.g., nondiscrimination, vesting, maximum benefit limits) of the tax code.

The IRS also will not issue private letter rulings on this matter. However, if a taxpayer is eligible to apply for and receive a determination letter, the IRS will no longer include a caveat expressing “no opinion” regarding the tax consequences of a pension plan document that includes such a window.

Although certain plan sponsors—such as those pursuing means to curtail their DB plan liabilities and obligations through “de-risking” strategies or those considering terminating a frozen plan—might find the notice of particular interest, they also should review non-tax considerations for possible implications. In particular, fiduciary responsibilities under ERISA should be contemplated, as well as potential exposure to ERISA-based litigation.

For additional information about the impact of IRS Notice 2019-18 on your DB plan or to discuss lump-sum window options and plan amendments to adopt such changes, please contact your Milliman consultant.

Milliman FRM Insight: February 2019 Market Commentary

After its best January in more than 30 years, the S&P 500 rose again in February, completing a full recovery from its 16% December drawdown. Bolstered by dovish Federal Reserve comments and rising prospects for a U.S./China deal, S&P volatility edged sharply lower for the second month in a row. Stocks were supported by a continuation of January’s solid earnings reports, with 70% of companies reporting in February beating estimates by an average of 10%. Managed risk benchmarks increased their equity exposure again in February.

Milliman’s Joe Becker offers more perspective in this month’s market commentary. Download the full commentary at

Pitfall questions for NDCPs attempting to successfully navigate an M&A transaction

Nonqualified deferred compensation plan (NDCP) sponsors can experience challenges during a merger and acquisition (M&A) due diligence test because of Internal Revenue Code (IRC) Section 409A compliance. However, even if all the NDCPs pass this potential problem, there are still other challenges to solve before this critical examination is completed. Two such questions are “fit” related: (1) will the NDCPs still fit within the top-hat exemption post-merger; and (2) have the NDCPs Federal Insurance Contributions Act (FICA) taxes been properly applied to the benefits? In this article, Milliman’s Dominick Pizzano and White & Case’s Henrik Patel prepare NDCP sponsors to address these two important topics and alert them to any trick questions they may pose.

Uncertainty persists for multiemployer pension plans

Many multiemployer pension plans will not be able to pay the full value of promised benefits to future retirees, and additional measures will be needed in order for them to do so. An immediate concern is the Pension Benefit Guaranty Corporation’s multiemployer trust fund, which is expected to be exhausted by 2025, following the projected insolvency of the Central States, Southeast & Southwest Areas Pension Plan and several other deeply troubled plans that are expected to become insolvent during the next six to seven years. These concerns led to the formation of the Joint Select Committee on Solvency of Multiemployer Pension Plans. In November, a Joint Select Committee deadline to propose a solution came and went, with the committee chairs indicating the committee will continue its work toward a bipartisan solution. This Milliman Multiemployer Alert offers some perspective.