A Milliman client, a global information technology (IT) company, acquired an operation in Spain. Along with the acquisition came the operation’s local retirement program, with its associated assets and liabilities, including a defined benefit (DB) pension obligation.
As part of the acquisition process, an actuary—appointed by the seller—carried out an actuarial valuation of the existing local retirement liability. Not long after the acquisition, the company asked Milliman to carry out the actuarial valuations for accounting purposes, covering operations in several countries.
To read more about the work Milliman did—and to learn why expert international actuarial advice is so important for successful global M&A deals—see Dominic Clark’s article here.
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.
President Obama is expected to sign into law the recently passed Highway and Transportation Funding Act (HATFA). As enacted, single-employer and multiemployer defined benefit pension plan sponsors will see temporary reductions in minimum required contributions and may be able to avoid benefit restrictions. Because the new law as written applies retroactively to the 2013 plan year (absent an election to opt out), affected plan sponsors will have to make decisions soon, ideally equipped with yet-to-be published technical guidance from the Internal Revenue Service (IRS).
At a minimum, plan sponsors will need to quickly instruct their plan actuaries to redo the 2013 actuarial valuation calculations or formally elect to opt out.
In general, the new law modifies the 2012 Moving Ahead for Progress in the 21st Century (MAP-21) Act interest-rate corridors used by affected sponsors to determine their minimum funding liabilities. HATFA maintains a narrower corridor than MAP-21 for the 2013 to 2017 plan years and then phases in a wider corridor over four years beginning in 2018. A plan sponsor may elect, in writing, to retain its use of the MAP-21 interest-rate corridor only for the 2013 plan year; starting in 2014, use of the HATFA corridors by all plan sponsors is required.
Plan sponsors face a number of time-sensitive decisions and actions as a result of HATFA’s enactment. For example, absent an election to opt out, the narrower 2013 plan year interest-rate corridor will require a revised actuarial valuation. Plan sponsors will also have to revise their disclosures to reflect the HATFA changes in the next annual funding notices. As the HATFA change temporarily reduces the amount a sponsor must contribute and the tax deductions for those contributions, the employers’ taxable income could increase. And longer term, required pension plan contributions should increase after the temporary “smoothing” provision expires, depending on corporate bond interest rates and other factors at that time.
The HATFA provision does not affect multiemployer defined benefit pension plans nor Pension Benefit Guaranty Corporation (PBGC) premiums. The pension-related provisions in HATFA also include changes for certain plan sponsors in bankruptcy, and companies subject to the rules of the Cost Accounting Standards Board (CASB) will have to adjust their CASB recovery calculations. Cooperative/small employer charity plans will need to recalculate their plans’ full funding limits.
For additional information about HATFA’s pension provisions and assistance with exploring the short- and long-term pension funding options, please contact your Milliman consultant.
Trustees of public pensions programs have long had the need to perform due diligence to ensure they are using taxpayer money prudently, as well as funding plans appropriately to provide for retirees’ years of public service. To confirm that a pension system’s plans are properly funded, annual actuarial valuations are crucial, which leads many public retirement systems to seek a second actuarial opinion. Best practice dictates a regular audit to: a) ensure that valuation calculations were done accurately, and b) offer a professional second opinion in assessing the appropriateness of the demographic and economic assumptions used.
Some public plans are legislatively required to have regular actuarial audits performed. For those without these legislative requirements, there are many reasons why actuarial audits of pension systems are necessary:
• Conducting an actuarial valuation audit is good governance for public funds and helps increase public trust in the management of funds. An audit ensures trustees that valuations are being performed on an ongoing basis to serve the financial objectives of the system, while preserving the ongoing relationship with the consulting actuary, who knows the particular pension plan best.
• The auditing actuary may have a different perspective that leads to better understanding of the valuation overall. A second opinion can provide recommendations for improvements in the valuation process, perhaps through how the information is presented in reporting and communications.
• If the auditing actuary feels changes in calculations or assumptions are needed, suggestions for specific steps can be provided for the retirement system or consulting actuary to pursue. That means trustees won’t be faced with questions like, “How can we fix that?”
Actuarial audits vary by situation, with some calling for full replications of the most recent actuarial valuation whereas others are more limited in scope. Often the auditing actuary must execute much of the same work for either option. A full-scope audit is generally the best way to ensure confidence in the valuation results.