Regulatory roundup

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

Proposed rule amending regulations on guaranteed benefits and asset allocation
The Pension Benefit Guaranty Corporation (PBGC) proposed amendments to its regulations on guaranteed benefits and asset allocation. These amendments would incorporate statutory changes to the rules for participants with certain ownership interests in a plan sponsor.

To learn more, click here.

2018 Publication 15-B: Employer’s Tax Guide to Fringe Benefits released
The Internal Revenue Service has released 2018 Publication 15-B Employer’s Tax Guide to Fringe Benefits. This publication was updated to reflect the changes made by the Tax Cuts and Jobs Act, an act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.

For more information, click here.

Pension spring cleaning can start with required minimum distributions

One of the most daunting challenges a pension plan can face is distributing required minimum distributions (RMDs) at a terminated vested participant’s required beginning date (RBD). The RBD is akin to cleaning house for the IRS because tax-deferred income must start being taxed by the statutory date. Ostensibly, this income will be taxed in full within the participant’s lifetime.

The fall is the perfect time to take stock of which participants (including alternate payees, spouses, and non-spouse beneficiaries) are required to commence payment by April 1 of the following year. Any corrective actions that need to be taken for those participants who missed their RBDs may be completed before filing Form 5500.

To read more about cleaning up with required minimum distributions, read Jennifer Godwin’s article here.

Corporate pensions’ investment losses in February buoyed by higher discount rates

Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. Despite the market volatility in February, these pensions experienced a $13 billion improvement in funded status thanks to an increase in the corporate bond rates used to measure pension liabilities. While the market value of assets for these pensions lost $32 billion in February, plan liabilities also shrunk, narrowing the deficit from $219 billion at the end of January to $206 billion as of February 28. The funded ratio for the Milliman 100 PFI rose from 87.3% to 87.7% during the same time period.

Despite the recent market volatility, February’s 21 basis point discount rate increase buoyed pension funding this month. In fact, thanks to strong investment performance in January along with an increase in discount rates in both January and February, overall pension funding for these plans has risen $75 billion over the past two months – not a bad way to start 2018.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.45% by the end of 2018 and 5.05% by the end of 2019) and asset gains (11.0% annual returns), the funded ratio would climb to 99% by the end of 2018 and 114% by the end of 2019. Under a pessimistic forecast (3.45% discount rate at the end of 2018 and 2.85% by the end of 2019 and 3.0% annual returns), the funded ratio would decline to 82% by the end of 2018 and 75% by the end of 2019.

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

Milliman FRM Market Commentary: February 2018

Volatility awakened in February after two-year hibernation. In this month’s commentary, Milliman’s Joe Becker addresses the following:

• After 15 consecutive months of positive returns, the global equity market posted its first negative monthly return since October 2016 and its highest monthly volatility since June 2016.
• Up more than 7% ytd into late January, the global equity market quickly changed direction and sold off more than 9% in less than two weeks.
• February saw 12 daily moves in the S&P 500 of at least 1%, already 50% more than 2017’s total of eight. In addition to higher realized volatility, the VIX spiked to its highest level since August of 2015.
• The start of February’s downturn coincided with two economic data surprises. Larger-than-expected growth in both payrolls and average hourly earnings triggered fears that the Fed would begin to tighten policy at a faster rate than previously expected.
• As is often the case in times of market stress, February’s downturn saw correlations across market segments and asset classes push higher.

To learn more, download the full commentary at

Tax reform provides incentive to accelerate pension contributions

The end of 2017 saw the passage of significant tax reform in Congress. With this tax reform, the corporate tax rate has dropped from 35% to 21%, generating quite a bit of attention due to the significant savings that will result for corporations. One relatively unpublicized result has been the additional funding of cash contributions to corporate defined benefit plans.

While contributions made for the 2018 plan year will generally be deducted at the new lower corporate tax rate of 21%, contributions for the 2017 plan year will generally be deducted at the higher rate of 35%. For many corporations with underfunded pension plans, contributing additional dollars or accelerating already planned contributions will generate a net tax savings because underfunded plans are expected to eventually require additional contributions.

More and more, the plan sponsors are issuing corporate debt to make additional pension contributions. For example, General Electric recently announced that it was making a discretionary contribution of $6 billion into its pension plan funded through debt.

In addition to recent tax reform, here are three other reasons we are seeing this trend on the rise:

1. Skyrocketing Pension Benefit Guaranty Corporation (PBGC) premiums. The variable rate premium that corporations pay on underfunded liabilities has increased from 3.4% of the underfunding in 2017 to 3.8% in 2018 (and 4.2% in 2019, as listed in the PBGC website). Any contribution in 2018 to the pension plan immediately reduces the PBGC premium by 3.8% in 2018 (and more in future years). Additionally, that money would then be invested and anticipated to grow with the plan’s expected return (say 6.25%). This leads to an effective return on capital of 10.29% in 2018 (and 10.71% in 2019), and higher returns are anticipated in future years).
2. Updated mortality will drive PBGC liabilities higher by approximately 4%, leading to significant increases in the variable rate contribution.
3. Corporate interest rates remain low and corporations are able to borrow at relatively low costs.

For the purpose of example, let’s look at a theoretical additional contribution of $10 million into an underfunded pension plan. This additional contribution would:

• Reduce fees paid to the PBGC by $380,000 in 2018 (and $420,000 in 2019, and growing in following years)
• Be invested in the trust, and therefore would be anticipated to grow by a company’s expected return on assets in 2018 (likely 5% to 7%, which translates to $500,000 to $700,000 on a full-year basis)
• Reduce the Financial Accounting Standards Board (FASB) accounting expense in 2018 and beyond (by an amount similar to investments in the trust, depending on timing)—to the extent these contributions were anticipated at the beginning of the fiscal year
• Be tax-deductible at the 2017 corporate tax rates because any contribution before September 15, 2018, can count as a 2017 plan year contribution for calendar-year plans

However, there are some limitations:

• While plans that are fully funded on a PBGC basis will not see additional PBGC savings, they will see the additional tax and expense savings as outlined above
• Because of the structure of the PBGC variable rate premium, additional contributions to plans at the PBGC variable premium cap (due to head count) may not share the PBGC advantages, but will see the additional tax and expense savings as outlined above

With tax reform now in place, many corporations are poised to take advantage of opportunities to improve the financial status of their defined benefit retirement plans. Acting sooner rather than later on this opportunity will enable them to stabilize and move their plans more firmly into the black.

Plan-specific substitute mortality tables

In October 2017, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) released final regulations prescribing new mortality tables that apply to single-employer defined benefit pension plans for the purpose of calculating the actuarial liabilities for minimum funding requirements, benefit restrictions, and Pension Benefit Guaranty Corporation (PBGC) variable-rate premiums. As with the prior regulations, the new regulations give plan sponsors the option to use either the standard mortality tables developed by the IRS, or to develop plan-specific mortality tables.

The new regulations significantly revised the rules regarding plan-specific substitute mortality tables. Under the prior rules, a plan was required to have fully credible mortality experience in order to use substitute mortality tables. The new rules allow for the use of substitute mortality tables for plans with smaller populations that do not have fully credible mortality experience. As a result, Treasury and the IRS expect that significantly more plan sponsors will request approval to use substitute mortality tables.

Using substitute mortality tables should theoretically improve the fit between expected and actual mortality rates, thereby producing smaller experience gains and losses over time. In addition, for plans employing a workforce that exhibits heavier mortality than the standard tables, using substitute mortality tables could potentially lower both minimum required contributions and PBGC variable-rate premiums.

For these reasons, plan sponsors may want to consider the use of substitute mortality tables. A written request must be submitted by the plan sponsor at least seven months before the first day of the first plan year for which the substitute mortality tables are to apply.

Note that the regulations do not allow plan sponsors to use plan-specific tables for determining minimum lump-sum values; standard IRS tables continue to be used for this purpose.