Retirement income covenant considerations for Australia’s superannuation system

The riddle of the superannuation system is that the needs of workers saving for retirement are relatively simple while the needs of retirees are incredibly complex. Those saving for retirement want to generate the highest long-term investment returns within certain tolerances for risk. Retirees want to generate the highest lifetime income possible with both certainty and flexibility.

Super fund trustees will soon need to balance these competing objectives thanks to a proposed Retirement Income Covenant. This covenant will codify their requirements and obligations to improve retirement outcomes for members.

The challenge for super fund trustees centres on Comprehensive Income Products for Retirement. Funds must take care in constructing a retirement income strategy, especially one that focusses on the “collective needs of members” as described in the covenant position paper.

To read more about the challenges facing trustees as they begin to grapple with the proposed Retirement Income Covenant, see this article by Milliman’s Jeff Gebler and Adam Shao.

Milliman FRM Market Commentary: June 2018

Global equity segments sharply diverged heading into second half. In this month’s commentary, Milliman’s Joe Becker addresses the following:

• The S&P 500 notched its third positive monthly return, locking in a solid Q2 gain of 3.4%. Relative to last year, however, its year-to-date (YTD) return of 2.6% is less than one-third of what it was through this time in 2017 (9.3%).
• Meanwhile, small cap stocks, deemed to have less exposure to the detrimental effects of trade wars, are up 9.4% YTD, their best first-half return of the last five years.
• The same cannot be said for emerging market stocks, which were down more than 7% in Q2 and are down nearly 15% from their all-time high in January. Among the worst performers have been China and Brazil, down 13% and 18% YTD, respectively, in USD terms.
• Notwithstanding back-and-forth trade war rhetoric, U.S. equity market volatility trended lower as the month wore on; June’s volatility was lower than May’s and was also below its five-year average.
• The correlation of the S&P 500 to global ex-U.S. equities declined during the month while its correlation to the U.S. aggregate bond market remained largely unchanged.

To learn more, download the full commentary at

Repurchase liability studies help ESOPs assess financial impact of distributions on cash flow

Closely held corporations that sponsor an employee stock ownership plan (ESOP) have a financial obligation to repurchase (or buy back) the stock held by participants who have a distributable event or are eligible for diversification. Depending on the terms of the plan document, a distributable event could occur because of termination of employment, retirement, death, or disability. Diversification opportunity in an ESOP occurs when a participant is age 55 and has 10 years of plan participation.

Why do a study?
As a plan matures, account balances in the ESOP can become quite large, requiring significant cash outlays from the company to provide liquidity for the distributions. Unlike other retirement plans, financial changes to an ESOP impact the financial statements of the company, so it would seem prudent to do a repurchase liability study because understanding the potential cash requirements over time is critical for financial planning for the company.

Who should do a study?
Early in the life of an ESOP, and especially if the ESOP is leveraged, there may not be a distribution event for several years, and if there is such an event, the repurchase obligation is not very high. But as time goes by and the ESOP matures, the potential repurchase liability grows. A repurchase liability study should be considered if any of the following apply:

• There is an ESOP that is making regular distributions to participants
• The company stock is increasing in value
• The company is considering other ESOP transactions, such as re-leveraging
• The company is considering a change in plan design

How often should plan sponsors do a study?
The frequency with which studies should be done varies by circumstances. If an ESOP is relatively new, you may only need to do a study on a five-year interim basis. However, in practice, most mature ESOPs do a study once every three years.

If distribution options are changing or accelerating you may want to perform a study that includes various scenarios to determine the impact of the changes on the provisions. Also, if re-leveraging, purchase of additional shares, or further changes are planned to the funding of the distributions, a repurchase liability study would be a prudent course of action.

How to select a repurchase liability study provider
Here as some tips for selecting a repurchase liability study provider:

Experience. Be sure to hire someone who is well versed in ESOPs and with whom you can communicate regarding particular challenges.

Analysis. Ask for a sample report, which includes the narrative regarding the results of the study. It is critical that whomever is hired to run your report can clearly interpret the results and help you understand how they interact with the cash flow of your company.

Assumptions. It is also important that the correct assumptions are used to get the most accurate projections possible. For instance, you might want to use your plan’s average diversification rate rather than the worst case scenario of 100% diversification. The change in assumptions will produce significantly different results. Your repurchase liability obligation study provider should be able to help you understand the significance of the assumptions.

How might the study affect plan design or operational decisions?
Case Study 1: Engineering and manufacturing company, 1,500 employee owners
The study: An engineering and manufacturing client hired Milliman to conduct a repurchase liability study that included both a base scenario and alternative scenarios.

The challenge: The client wanted to determine how to handle its repurchase liability obligation, as well as model the possibility of re-leveraging. Specifically, the client wanted to know when to re-contribute repurchased shares and to understand how re-leveraging would impact cash flow.

The impact: The results report and accompanying consulting provided clarity to the company. As a result, the company is reviewing potential changes to the way the repurchase obligation is handled to avoid issues in the future. Specifically, it is considering changing from redeeming the shares and recycling on a periodic basis to recycling the shares on a more frequent basis.

Case Study 2: Engineering and architectural company, 1,000 employee owners
The study: An engineering and architectural client hired Milliman to run a base study on its current distribution policy, as well as alternative scenarios at varying levels to determine how changes would impact the cash flow.

The challenge: The client was considering changing its policy to provide for acceleration of distribution for certain circumstances (death, divorce, stock balances under a certain threshold).

The impact: Based on the results of the study, the client was able to assess the projected financial impact of the proposed change, deciding to amend its distribution policy to better benefit participants. Without the study, it would have been difficult to assess the financial impact to the cash flow, which is a critical piece of information needed when making changes to ESOPs.

In conclusion, closely held companies that sponsor an ESOP should strongly consider conducting a repurchase obligation study at regular intervals or when considering a financial transaction involving the ESOP. To learn how a repurchase liability study can benefit you, email us.

Regulatory roundup

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

PBGC issues proposed rule on terminated and insolvent multiemployer plans and duties of plan sponsors
The Pension Benefit Guaranty Corporation (PBGC) issued a proposed rule to amend its multiemployer reporting, disclosure, and valuation regulations to reduce the number of actuarial valuations required for smaller plans terminated by mass withdrawal. The proposed rule also seeks to add a valuation filing requirement and a withdrawal liability reporting requirement for certain terminated plans and insolvent plans.

To read the entire proposed rule, click here.

What does the multiemployer pension funding crisis look like?

On Friday, July 13th, the Joint Select Committee on the Solvency of Multiemployer Pension Plans will hold its 5th public hearing as it seeks to investigate issues around the operations and solvency of multiemployer pension plans. Friday’s hearing focuses on what’s at stake for current workers and retirees.

In light of the Congressional work around this subject, Milliman has put together an infographic that visually explains some of the complexities underlying the multiemployer pension funding problems. The data is taken from Milliman’s Spring 2018 Multiemployer Pension Funding Study, which reports on the estimated funding status of all U.S. multiemployer plans.

Source: Milliman Spring 2018 Multiemployer Pension Funding Study


Milliman joins Alliance for Lifetime Income as part of firm’s larger vision to improve and protect Americans’ retirement security

Milliman today announced that the company has joined the Alliance for Lifetime Income as a founding member. The Alliance, a newly launched nonprofit organization supported by 24 leading insurance and financial services organizations, is focused on educating Americans on the risk of outliving their savings and about the importance of protected retirement income.

“There are an estimated 10,000 Baby Boomers retiring each day in the U.S., and many lack adequate sources of protected retirement income,” said Ken Mungan, Chairman of the Board, Milliman, Inc. “As people move from their working years to retirement, the retirement planning narrative has to shift. Milliman is privileged to play a role in this unprecedented industry collaboration.”

Milliman clients include pension plan sponsors, defined contribution plan sponsors, and providers of guaranteed lifetime income solutions. The firm brings a broad perspective on retirement security to the Alliance, while also providing some of the sharpest minds on the retirement income challenge facing many Americans.

“The insurance industry is poised to play a major role in solving the retirement income crisis in America,” Mungan added. “Through the pooling of risk, a cornerstone of insurers, retirees can help fill the income gap between their Social Security and employer-provided retirement, and their true lifetime income needs.”

The Alliance will offer thought leadership, research, third-party expert views, and tools on an ongoing basis. To learn more, visit Follow the Alliance on Twitter @alincome.