Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

Social Security announces 2.8 percent increase for 2019
The Social Security Administration has announced that Social Security and Supplemental Security Income (SSI) benefits for more than 67 million Americans will increase by 2.8 percent in 2019.

For 2019, the Social Security taxable wage base will increase to $132,900 from $128,400 in 2018. The Social Security Old-Age, Survivors, and Disability Insurance (OASDI) tax rate will remain at 6.2% on wages up to the $132,900 wage base.

The Medicare Hospital Insurance (HI) tax rate will remain at 1.45% on all wages. However, earned income exceeding $200,000 ($250,000 for married couples filing jointly) also remains subject to an additional 0.9% Medicare HI tax. The earned income amount was set by law in 2013.

To download SSA’s cost-of-living-adjustment fact sheet, click here.

PBGC releases 2019 premium rates
The Pension Benefit Guaranty Corporation (PBGC) updated premium rates for 2019 after reflecting increases and indexing required by section 4006 of ERISA, as amended by The Bipartisan Budget Act of 2015.

To see the new premium rates, click here.

PBGC requests OMB approval with modifications of reportable events and certain other notification requirements
The PBGC is requesting that the Office of Management and Budget (OMB) extend approval of PBGC’s regulation on Reportable Events and Certain Other Notification Requirements with modifications

In this renewal request, the PBGC is proposing that all reportable events filings include controlled group information, company financial statements, and the plan’s actuarial valuation report. Currently there are five reportable events where some or all of that information isn’t required. All three types of information would be added to two of these events (“Active Participant Reduction” and “Distribution to a Substantial Owner”). One type of information would be added to two events (“Transfer of Benefit Liabilities” and “Change in Contributing Sponsor or Controlled Group”), and two types to one event (“Extraordinary Dividend or Stock Redemption”).

These reporting requirements give PBGC notice of events that may indicate plan or employer financial problems. The additional information is needed to help PBGC determine a sponsor’s ability to continue to maintain a pension plan.

PBGC enhances Section 4062(e) web page
The PBGC has expanded and modified the information on pbgc.gov related to liability that may arise when an employer ceases operations at a facility under ERISA section 4062(e), as amended by Public Law 113-235. The revised web page provides basic information about 4062(e), answers to frequently asked questions, and information on reporting to PBGC.

To see the revised web page, click here.

Funded ratio for 100 largest U.S. corporate pensions hits 10-year high in September

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In September, these pensions experienced a $21 billion increase in funded status due to an increase in the benchmark corporate bond interest rates used to value pension liabilities. From August 31 to September 30, the monthly discount rate rose 13 basis points, climbing from 4.05% to 4.18%. As a result, the projected benefit obligation (PBO) for these plans decreased by $27 billion, but was offset by a $6 billion decrease due to investment losses. As of September 30, the funding ratio for the Milliman 100 PFI was at 94.5%, up from 93.3% the previous month.

September’s funded ratio marks a 10-year high and is the closest these plans have been to being fully funded since September 2008. But the improvement is overshadowed by the market losses experienced over the past couple days, which could very well lead to a reversal of these funding gains.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.33% by the end of 2018 and 4.93% by the end of 2019) and asset gains (10.8% annual returns), the funded ratio would climb to 98% by the end of 2018 and 114% by the end of 2019. Under a pessimistic forecast (4.03% discount rate at the end of 2018 and 3.43% by the end of 2019 and 2.8% annual returns), the funded ratio would decline to 93% by the end of 2018 and 85% by the end of 2019.

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.

Flat returns for multiemployer pensions in first half of 2018 dampen funding progress

Milliman today released the results of its Fall 2018 Multiemployer Pension Funding Study (MPFS), which analyzes the funded status of all multiemployer pension plans in the United States. As of June 30, 2018, the aggregate funded ratio of these plans was at 81%, down from 83% at the end of 2017.

The drop in funded ratio is largely due to lackluster performance by investment returns, which were flat through the first six months of 2018. Milliman’s simplified portfolio earned about 0.2% for the first half of the year, well below the 3% to 4% assumed rate of return for most plans and in stark contrast to the 16% aggregate return experienced in 2017.

We’ve said it before and we’ll say it again: the funded status of multiemployer pensions is primarily driven by investment performance. As Congress explores potential solutions to improve the solvency of these pensions, plans need to continue looking for ways to reduce risk exposure and protect their members in the case of a potential stock market downturn.

As of June 30, 2018, 355 of the plans studied had a funded ratio at or above 100%, while 258 plans had a funded ratio at or under 70%. To view the complete study, click here.

To receive regular updates of Milliman’s pension funding analysis, contact us here.

Longevity risk considerations for Dutch pension funds

To determine required reserves for pension finds in the Netherlands, funds must consider various risk categories and their interdependencies. Reserves should be such that the overall likelihood of underfunding after one year is less than 2.5%. Mortality is one of the risk categories.

In the Netherlands, Milliman consultants distinguish three elements in mortality risk:

1. Process risk – This originates from abnormal adverse variation in insurance results in one year.
2. Trend mortality uncertainty – This covers the uncertainty regarding the longevity trend.
3. Negative stochastic deviation – This covers the risk that estimated mortality rates differ from the actual mortality rates.

The impact of trend mortality uncertainty is relatively large because a good estimate requires a large amount of data. And small changes in the trend can have large effects.

In this article, actuaries Rajish Sagoenie and Gert Maarsen describe in more detail how pension funds in the Netherlands deal with longevity risk and look into current developments, including updates to mortality tables.

Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

BLS charts workers’ access to defined contribution retirement plan
In March 2018, 51% of private industry workers had access to only defined contribution (DC) retirement plans through their employers. An additional 13% had access to both defined benefit (DB) and defined contribution retirement plans at their workplaces, while 4% of private industry workers had access to only defined benefit retirement plans.

To learn more, click here.

Final Rule on owner-participant changes to guaranteed benefits and asset allocation
The Pension Benefit Guaranty Corporation (PBGC) is amending its regulations on guaranteed benefits and asset allocation. The PBGC Final Rule contains amendments that incorporate statutory changes to the rules for participants with certain ownership interests in a plan sponsor.

The rule amends PBGC’s benefit payment regulation by replacing the guarantee limitations applicable to substantial owners with a new limitation applicable to majority owners. Additionally, this final rule amends PBGC’s asset allocation regulation by prioritizing funding of all other benefits in priority category 4 ahead of those benefits that would be guaranteed but for the new limitation. The rulemaking also clarifies that plan administrators may continue to use the simplified calculation in the existing rule to estimate benefits funded by plan assets. Finally, it provides new examples to aid in implementation.

To read the entire final rule, click here.

 

Student loan repayment considerations for 401(k) plan sponsors

Employers take different viewpoints when addressing employees’ requests for help in managing personal financial obligations.

Abbott Laboratories, for example, received approval from the Internal Revenue Service (IRS) in a Private Letter Ruling (PLR) on the question of an employer’s use of a 401(k) plan as an incentive for employees to reduce their student loan debt. In this case, the employee pays down student debt without missing the “free money” from the employer’s contribution.

The company applied for the student loan benefit program PLR in August 2017 and went up and back with the IRS a number of times in 2018. The PLR outlines how the student loan repayments (SLRs) work and explains the SLR nonelective contribution employees can receive for making the SLR.

This creative and uncommon 401(k) plan provision could help reduce anxiety among workers who are concerned about personal financial obligations to the point of distraction, making them less productive. And it may also help staunch the loss of talent to competitors.

To learn more about creative plan provisions to ensure employees’ financial wellness, read Charles Clark’s article “Helping employees to financial wellness: An innovative approach.”