Tag Archives: Bart Pushaw

Defined benefit (DB) plan considerations for M&As

This blog is the fourth in a series of six that will highlight considerations for and the impact of employee benefit plans on mergers and acquisitions (M&A) transactions. Click here for additional blogs in this series. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.

Transactions occur regularly and come in a multitude of structures and players. Sometimes they’re simple two-dimensional deals—one buyer, one seller—sometimes they’re multidimensional—multiple buyers and sellers, plus unions, government entities, federal agencies, etc.

Urgency usually is the call of the day. Properly and quickly assessing the deal landscape under a current lens, as well as a forward-looking post-deal lens, can be crucial for the deal to be successful for all involved.

The incidence of defined benefit (DB) pension plans requires separate expertise to be included on the due diligence and post-merger teams. The amount of work involved in this area can usually be quickly assessed by an experienced actuary. It may have little impact on the structure of the deal or it may drive large elements of the deal, significantly impacting the purchase price or killing the deal entirely.

Below are a few elements to consider from the buyer’s perspective and some examples of the impact they can have on the deal:

Element Consideration Impact
Discount Rates Can vary significantly depending on different viewpoints and market fluctuations. Can impact annual costs, balance sheet entries, and funded status significantly.
Plan Demographics and Demographic Assumptions Can vary significantly from expectation.

For example, a business might have a pension plan with 10 times the number of plan participants as employees.

Review demographics assumptions used in the valuation compared with experience and critical plan provisions.

This can impact go-forward policies and plan operating requirements.

Key benefit provisions could be undervalued or not valued at all with significant liability underreporting.

Auditors Have varying practices.

For example, some audit teams allow companies to net supplemental employee retirement plan (SERP) liabilities against rabbi trust assets.

Accounting allowances vary significantly between auditors: acceptable to theirs may not be acceptable to yours.
Balance Sheets Only show net amounts. Can mask underlying plan size and corporate impact. Even the slightest movement in plan assets or liabilities can dramatically change balance sheet entries.
Liabilities Withdrawal liability. Can be surprisingly high.
  Management employment contracts. Usually trigger additional liabilities with change-in-control.
Termination liabilities. Buyer should be aware that ERISA or GAAP funded status may not be a good measure of the cost to terminate the plan.
Unpredictable contingent event benefits (UCEBs) that are due to plant shutdown or layoff. Buyer should be aware of these provisions and potential impact to cash funding and expense.
At-risk status. Plans with a low enough funded status will require additional cash contributions, special Pension Benefit Guaranty Corporation (PBGC) valuations and reporting, a potential freeze on benefit accruals, and restrictions on some optional forms of payment.
Funding Onboarding underfunded plan. Can affect entire controlled group executive nonqualified deferred compensation (NQDC) plans and loan covenants.
  Merging an underfunded plan. Can trip funding thresholds in combined plan with amplified effects.
  Synergy-driven plant closings. Can trigger unsought involvement of federal pension oversight agencies and massive accelerations in cash contribution requirements.
  Uncertified plan benefits.


Require additional work and perhaps additional liabilities.
  Seller may be obligated for continued, post-close contributions. Who is responsible, especially if agency agreements are in place?
Carryover and prefunding balances (credit balances). Large credit balances may mask upcoming cash contribution requirements.
  Contribution due dates.


Can cause surprises. Who pays, who deducts?
  Plans may have existing agreements with the PBGC. May require additional contributions.
  Project plan costs. Significant changes in cost might emerge in near-future years, impacting economics of deal.
Legal Noncompliant plans.


Bring significant resource diversions and legal liability.
  Current audits or investigations by the Internal Revenue Service (IRS), PBGC, or U.S. Department of Labor (DOL). May impact legal and financial obligations as well as reputational risks.
  Material claims pending or threatened related to the plans. Same.
Valuations Negotiated benefit increases or cost-of-living adjustments (COLAs) in collective bargaining agreements (CBAs) might not be fully reflected in valuations. Liabilities that are due to current contractual agreements may not be reflected in liability disclosures.

Additional retirement plan considerations include:

• Inventory discovery may lead to undisclosed plans and liabilities
• Carve-outs can spin plans many different ways, affecting future plan/corporate economics
• State of target’s plan administration could bring burdens
• Proper administration support for the pension plans
• In-house pension expertise evaporating on both sides
• Poison pills need valuation and assessment
• Foreign plan issues such as termination indemnities (if any)
• With the elimination of the Internal Revenue Service (IRS) approval process for individually designed qualified retirement plans, it will be important that plan changes going forward do not jeopardize the qualified tax status of the plans, upon random audits from the IRS.

Pension plans can add complexity to a merger or acquisition. It is important to involve an actuary in the process to identity and help mitigate risks.

Planning key to avoiding pension termination data pitfalls

Pushaw-Bart“Data! Data! Data!” Sherlock Holmes cries impatiently in a story by Sir Arthur Conan Doyle. “I can’t make bricks without clay!” Nothing could be truer, especially when it comes to a pension plan termination. However, this might easily be forgotten in the preparation process.

Plan sponsors can get bogged down with all the actuarial numbers, all the cash and accounting charges, all the corporate approvals, all the regulations. It’s a lot. Yet a pension plan and its termination remain at the mercy of the data. And there is a lot of data because there are a lot of participants. And properly dealing with it is a lot of detailed work.

First, plan sponsors will need to calculate final benefit amounts. Second, they will need to get this information into the hands of the participants—each and every one of them. Third, they’ll need participants to return completed election forms. And fourth, they’ll need to deliver the benefits to participants in either a lump sum (rollover) or annuity certificate. This may sound easy, but don’t count on it. These steps will not be successful without good data. When determining if your data is up to snuff, consider these factors.

At first blush, management might simply think of plan participants as current employees. However, former employees who retain a vested benefit in the plan and former employees who are retired and receiving monthly pension checks, are also plan participants. While active employee and retiree data is most likely current and accurate, the same may not be true for former employees.

Benefit calculations
To calculate benefits, plan sponsors need final, complete, and accurate data. We’re talking data going back maybe 30 to 40 years; that’s before desktop computers, back when file cabinets were filled with index cards containing employment history. Consider these questions:

• How complete and accurate are your files?
• Do you have historical information on groups that came in via corporate acquisitions?
• Do you have applicable prior plan documents?
• Is the data in an electronic format?
• Can you verify benefit distributions that might have been made many years ago?
• Can you verify the details of benefit calculations that were prepared many years ago for former employees or for when benefit accruals were frozen for current employees?

Finally, take a look at the location of your people. Where are they—and can you find them? Think about things like name changes, cross-country relocations, divorces, deaths. Ask yourself:

• Do you have current mailing addresses? How do you know?
• How many missing people can you locate? How do you do that?
• If a former employee died, do you know if there is a surviving spouse who is due a benefit?

Once the decision is agreed upon, the work falls on plan committees and assigned staff. One large job, the single largest probably, is dealing with the plan participant data. So it’s important to understand and assess data issues early with assistance from your actuary or pension plan administrator.

The big bang theory and pension plan terminations

Pushaw-BartNuclear fission1 and pension plan termination. You’d be surprised at how much they have in common. In other words, left alone, fissionable material decays on its own, eventually distributing its last. On the other hand, with a little help, it can go away in one very big bang. It’s the same result in the end. Pension plans behave the same way. Left alone, they pay out monthly benefits along with lump sums, eventually distributing their final payments. The big bang version for a pension plan is a total termination. In either case, the result in the end is the same.

For a pension plan, these are the two extremes. Between these extremes is a continuum along the termination spectrum, which is controlled by the plan sponsor. We can accelerate the plan’s normal, slow rate of decay up to and including a big bang, total termination. This slower decay we ought to refer to as a termination, too, just not the big one, total termination. Today, such fractional terminations are popularly referred to as de-risking. Nothing new, mind you, just an updated moniker. Of course, with enough fractional terminations, we end up with a total termination just the same.

One type of fractional termination is a lump-sum window or cash-out initiative. Lump-sum windows usually refer to a plan which is offering lump-sum distributions to a vested group of former employees who otherwise would not have access to their benefits until retirement. The window of opportunity usually exists for a few months, then closes. Cash-out initiatives are slightly different in that the former employees already have access to a lump sum distribution but now are getting a friendly reminder. After declining the original offer, their lump sum may have grown and is perhaps now a bit more desirable. Both types of project can be regulated toward a manageable administrative size or with an eye toward avoiding unwanted accounting repercussions. Target groups are made up of those former employees who retain a vested benefit under the plan. Retirees in pay status are off limits. These groups may require administrative sleuthing if mailing address information is out of date.

Another type of fractional termination is off-loading plan obligations to an insurance company through the purchase of an annuity. This is the principal means of removing retirees from the plan. Carriers may want the business enough to drive the purchase price of the annuity down sufficiently to make the opportunity very attractive to a sponsor. These annuity placements may also be sized to fit the sponsor’s financial needs.

This leaves us with those plan participants who are still employed by the sponsor, which brings us back to the big bang total termination. We need to be a little clearer about this. A total termination is a big bang because you can distribute lump sums and place annuities for everyone left in the plan all at once. It also requires a high level of rigor as it falls under focused scrutiny by the U.S. Department of Labor, the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC). A big bang total termination is just a whole bunch of fractional terminations bundled up to occur all at once under a formal regulatory framework.

Nuclear fission can happen bit by bit over time or can be speeded up with sudden and dramatic results. Working a series of fractional terminations, perhaps leading up to a total termination, allows greater flexibility of timing and financial control for a plan sponsor.

1If your physics is a little rusty, nuclear fission is “the splitting of an atomic nucleus into approximately equal parts, either spontaneously or as a result of the impact of a particle usually with an associated release of energy. Collins English Dictionary, 12th ed. (2014). “Nuclear fission.” Retrieved January 18, 2016, from http://www.thefreedictionary.com/nuclear+fission.

Weighing income options can prepare individuals for retirement

Pushaw-BartPension plans are providing an ever-decreasing portion of retirement wealth as wave after wave of Baby Boomers reach retirement. In and of itself, this is neither surprising nor remarkable. What is remarkable, though, are two typical characteristics of what we are being left with regarding retirement wealth.

First, the jettison of pension plans means relying on defined contribution plans as the provider of principal retirement wealth. This is suboptimal inasmuch as these plans are typically 401(k) savings plans, originally introduced as a sideline fringe benefit scaled for purposes less than what they’re now required to deliver on. This is mostly a benefit-level issue of which we have seen recent hints of amelioration—namely, the industry recognizing that in an all-account-based retirement world, saving 16% of annual pay is in the ballpark, not the historical mode of 6% employee deferral (plus maybe 6% employer match totaling 12%). This relates to the second endangered characteristic, which needs to be brought into brighter focus: an in-plan solution for generating guaranteed retirement income.

Pension plans are wonderful for participants in that everyone is automatically a participant, automatically earning benefits on a meaningful trajectory, and automatically having the ultimate retirement wealth delivered on a lifetime guaranteed basis. Yes, 401(k) plans are trending this way on the first two, and the third is quickly emerging as another area where we need more pension-like alternatives.

One may generalize by saying that retirees take their 401(k) balances and roll them over when they retire. An economic conundrum baffling academics is that none or very few of these folks take advantage of insured annuities even in the midst of robust studies identifying them as an optimal solution for retirement income in face of investment uncertainty and longevity risks. This raises two subtle yet important points.

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Preparing for a pension plan termination

A plan sponsor’s decision to terminate a defined benefit pension plan requires significant due diligence and research. This Milliman paper, authored by actuary Bart Pushaw, addresses several items a plan sponsor should consider, including the difference between a freeze and a termination, types of terminations, the path to termination, and the termination process. Figure 5 below highlights the process of terminating a pension plan.

Terminating pensions

Cash balance plans: Why they may be a good opportunity for business owners, professionals, and executives

Pushaw-BartNew opportunities for owners and key staff to save for retirement on a tax-favored basis bring with them popularity and value. For this reason, a cash balance plan may be worth considering.

Owners and professionals
Cash balance plans have the potential to substantially provide for solid retirement security and shelter greater income from taxation to increase retirement wealth. These programs will not fit each and every owner’s situation, but a range of programs has been used to meet significant needs and concerns.

The typical case is one where the organization already contributes to an all-employee profit sharing or 401(k) plan. Oftentimes the program can be modified with a cash balance plan, extending it for owners who can then annually contribute amounts in excess of the profit-sharing-only maximum of $51,000. Additional annual tax-deferring contributions can range up toward $250,000.

The details of the programs can be worked out with advisors to custom fit most financial situations.

Executives at large corporations
The opportunities mentioned above are even better for corporate executives wishing to enhance their retirement wealth and financial security as well. Large corporations often sponsor nonqualified Supplemental Executive Retirements Plans (SERPs) for key management. Cash balance programs allow vastly stronger security arrangements, moving these benefits from the nonqualified arena to qualified status.

Adopting a cash balance plan could further strengthen the retirement promise, allowing monies to be put into trust for the sole benefit of the executives. No insurance contracts or long-term commitment would be needed. Investments would be controlled by management and allow access to institutional pricing of funds.

Again, every situation is different, but for executives, owners, and professionals the incorporation of a cash balance plan may be a great asset in the ongoing effort to secure a well-funded retirement.