Potential solutions for reducing PBGC premiums

Defined benefit (DB) plan sponsors continue to seek options to reduce their Pension Benefit Guaranty Corporation (PBGC) premiums, especially the variable rate premium. Milliman actuary Bret Linton highlights the following three solutions for plan sponsors to consider in his article “The challenge: Reducing PBGC variable rate premiums.”

1. Additional contributions, credited to the prior plan year.
2. Borrowing capital at a lower interest rate than the PBGC variable rate.
3. Splitting the pension plan into two plans: one with only actives and a second with the remaining retirees and terminated vested participants.

Boomerang employees: What employers need to know

In general terms, a boomerang employee is an individual who leaves an organization and later returns. The often-used and well-known example is Michael Jordan and his stint as a baseball player before returning to playing basketball in the NBA. Lately, however, there is a new trend among boomerang employees. Some are returning to their previous employers, but not from another company. Instead, they are actually coming out of retirement. This movement has become popular to the point that companies are implementing formal programs aimed at rehiring retirees. Some see the rehiring as crucial, especially given how Baby Boomers are retiring at an exceedingly faster rate (current estimates show 10,000 file for retirement benefits per day) and the much discussed labor shortage that some industries are currently experiencing.

These boomerang programs are expected to grow, especially among larger companies with the resources to implement this type of program and take on the associated costs. In fact, phased retirement for federal government employees has been rolled out over the last few years. Such a program allows employees considering retirement to instead reduce their hours over time while still receiving retirement benefits as active employees.

For the most part, retirees are rehired to work less than 1,000 hours per year, which reduces some of the associated retirement plan costs. But if an organization has this type of program, or is looking to implement one, it is worth taking the necessary time to review retirement plan documentation as well other benefits policies regarding rehires. Some things to consider when reviewing the retirement plan are:

• Does a company’s plan exclude any types of employees?
• How does the plan define eligibility for employee and employer contributions (or eligibility for benefit accruals in a defined benefit plan)? (Read carefully—it’s very likely rehired employees will be immediately eligible for employee contributions, at a minimum, and that should be properly communicated.)
• Make sure to have resources in place, internally or through the plan’s third-party administrator (TPA), to answer questions and confirm operational compliance.
• Review the plan’s withdrawal options—are they flexible?
• Is a procedure in place to ensure that employees terminating employment in order to start retirement distributions have a bona fide break in service (as opposed to a brief, sham retirement before starting distributions and returning to work)?
• Lastly, consult with your ERISA counsel for clarification if there are any concerns or questions regarding Internal Revenue Service (IRS) rules and other legislation.

When reviewing the health insurance repercussions for the boomerang employee, the most important thing to consider is how many hours this employee will be working during the year. As an employer, if the rehired employee(s) are only scheduled to work 1,000 for the year (20 hours per week), as seems to be the trend, there is no requirement to offer these rehired retirees health insurance. The Patient Protection and Affordable Care Act has strict rules on how rehires and new hires are classified and clearly defines full-time employees as those who work 30 hours per week.

However, the health plan specs should be reviewed carefully for items such as break in service rules, etc. The employer may wish to consider providing boomerang employees designated health insurance and retirement plan call center or HR resources to tackle these sometimes complex rules.

Taking a step back and looking at the big picture, there are many benefits to such a program. It can be great for organizational culture. “Retiree employees” know the ins and outs of a company and can continue to operate in familiar job functions or can step up to a mentor role; often they are happy to be working and create positive morale. There are also the benefits to the employer: not having to extensively train new hires; being able to implement flexible scheduling such as on an on-call, contract, or project basis; the ability to access years of historical data and information through individuals; and even using a potential retiree rehire program for retention purposes.

Overall, this is an interesting development in the human resources realm and serves as some food for thought.

Actuarial solution results in larger opportunities

Milliman was recently retained by a multinational company to provide actuarial services for its retirement programs in six countries. This article by Danny Quant highlights how Milliman’s solution turned the initial valuation contract into broader consulting opportunities.

The year 2017 starts with corporate funded status improvement of $9 billion

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. The year 2017 opened optimistically, with the funded status for these pension plans improving by $9 billion due to January’s investment gain of 0.87% as well as a small rise in corporate bond rates used to value pension liabilities. As a result, the funded ratio for these plans climbed 0.5% to 81.6% from 81.1% in December 2016.

January marks the fifth straight month of funded status improvement, with discount rates once again returning to 4.0%—albeit barely. And with investment returns coming in above expectations, 2017 seems like it’s off to a positive start for pensions.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.55% by the end of 2017 and 5.15% by the end of 2018) and asset gains (11.2% annual returns), the funded ratio would climb to 92% by the end of 2017 and 105% by the end of 2018. Under a pessimistic forecast (3.45% discount rate at the end of 2017 and 2.85% by the end of 2018 and 3.2% annual returns), the funded ratio would decline to 75% by the end of 2017 and 69% by the end of 2018.

Iowa Sheet Metal Workers Local Union No. 263 taps Milliman for its defined contribution services

Milliman today announced it has added the Iowa Sheet Metal Workers Local Union No. 263 as a defined contribution client. The plan covers collectively bargained members in the state of Iowa, with approximately 450 participants and $20 million in plan assets.

Milliman is providing recordkeeping and communication services for the union’s retirement savings plan. DiMeo Schneider provides investment consulting services and Benefits Management Group, Inc. provides administration for the plan. Both assisted with the search.

Milliman is committed to the Taft-Hartley community, and everything about our business model revolves around strong client service. We believe this has a lot of appeal to plan trustees. Our value proposition is more than a commodity service, and the trustees clearly appreciated our client support team.

Public pension funding status inches back down in Q4 as asset returns fall short of benchmark

Milliman today released the fourth quarter results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit (DB) pension plans. By December 31, 2016, the funded ratio of these plans had fallen to 70.1%, down from 71.0% at the end of September. The funded status declined by $54 billion, the result of modest investment returns for the fourth quarter that fell short of the quarterly benchmark.

The robust market performance seen post-election helped moderate the losses suffered in October, with Q4 investment returns of about 0.45% in aggregate for the quarter. If the recent surge in the equity market holds up and interest rates remain stable, the returns in 2017 Q1 should be much more promising.

The Milliman 100 PPFI total pension liability (TPL) increased from $4.620 trillion at the end of Q3 to an estimated $4.659 trillion at the end of Q4. The TPL is expected to grow modestly over time as interest on the TPL and the accrual of new benefits outpaces the benefits paid to retirees.

To view the Milliman 100 Public Pension Funding Index, click here. To receive regular updates of Milliman’s pension funding analysis, email us.