Tag Archives: de-risking

Designing a pension plan de-risking strategy

Milliman consultants helped one client prepare a strategic and practical strategy to de-risk their defined benefit (DB) pension plan. The consultants began discussions by explaining how the path to de-risking included a wide spectrum of options ranging from risk retention via modified plan design to third party risk transfer. The advantages and disadvantages including costs associated with several de-risking options were also discussed. The client’s decision would depend on their risk tolerance and willingness to incur additional short-term costs. Milliman’s Zorast Wadia explains how the firm helped the client meet their overall business objective in his case study “De-risking: Options available to reduce your pension plan footprint.”

Updated mortality tables for DB plan lump-sum payments starting in 2018

As expected, the Internal Revenue Service (IRS) has issued updated mortality tables for lump-sum payments paid in plan years beginning in 2018 for defined benefit (DB) pension plans. The use of the new mortality table in 2018 will increase the value of the lump-sum payment to participants by approximately 4% to 5%, depending on the age of the participant on the date of the lump-sum payment. This new lump-sum mortality table is mandatory and cannot be delayed for lump sums paid in 2018.

Although the new mortality table increases lump sums, the 2018 lump-sum interest rates may cause the lump sum value to go up or down. The lump-sum interest rates are also published by the IRS. They are based on three segment rates. The lump sum value is derived by discounting the actual monthly benefit payments at the appropriate segment rate back to the benefit commencement date. Under IRS rules, a plan may have up to a five-month lookback when establishing the lump-sum segment rates used for lump sums paid in a plan year.

The September 2017 rates that will be used for the 2018 lump-sum payments are just slightly higher than the September 2016 rates. We do not yet have the October, November, and December 2017 segment rates, but note that September 2016 reflected the lowest segment rates for lump-sum payments in 2017. So far in 2017, the segment rates have all been lower than the December 2016 segment rates. Lower interest rates translate to higher lump sum values because the monthly benefit payments are discounted at a lower interest rate.

Even with possibly higher lump sum values in 2018, depending on interest rates, it may still be beneficial to look at lump-sum windows in DB pension plans. This is due to increasing Pension Benefit Guaranty Corporation (PBGC) premiums which are indexed each year. In 2017, single-employer PBGC premiums were $69 per participant and $34 per $1,000 of unfunded vested benefits. For 2018, single-employer PBGC premiums will be $74 per participant and $38 per $1,000 of unfunded vested benefits. This is an increase of approximately 7% in the per participant PBGC flat-rate premium and an increase of approximately 12% in the PBGC variable rate premium. Thus, especially for small vested terminated benefits, the cost of a lump-sum window may be less than the present value of the PBGC premiums. Also, annuity purchase rates continue to be low, so again the cost of a lump sum window may be less than buying annuities for vested participants that have left the employer. For both of these reasons, 2018 may be a good time to explore lump-sum windows.

Preparing a pension plan termination

The process of terminating a defined benefit (DB) plan is lengthy, time-consuming, and costly. An actuary, trust custodian, attorney, trustee, and investment advisor can assist with many of the duties. In this DB Digest article, Milliman’s Stephanie Sorenson discusses the multiple tasks that plan administrators must accomplish in preparation for a plan termination.

Here’s an excerpt:

It is important to review and validate the participant data. Quality data is critical to the termination process. Insurer quotes will reflect the accuracy, actual or perceived, of the data provided to them.

Also the Pension Benefit Guaranty Corporation (PBGC) requires that the plan sponsor maintain the participant and plan data for six years after plan termination (the date on which PBGC Form 501 is filed). The data should be gathered during the plan termination process and remain accessible during the six-year period.

Does the data have valid identification numbers for all participants? Does the data contain valid dates of birth, hire, participation, and termination? If not, review employment records and update.

Does the data include addresses for all participants and beneficiaries? Are the addresses valid? Do any participants reside outside the United States? Many notices are required to be sent during the termination process. An address and death search for all inactive participants may be prudent.
Verifying addresses prior to termination can save time and frustration.

Have all of the accrued benefits been calculated and certified? If yes, does the data include the information that was used to calculate the stored accrued benefit? During the termination process, a Notice of Plan Benefits will need to be supplied to all participants. This notice is required to provide the personal data used to calculate the participant’s accrued benefit along with a statement requesting that the participant correct any information they believe to be incorrect. If the plan has frozen accrued benefits but the calculation data is not available, the best available data must be provided to the participant on the Notice of Plan Benefits along with a statement giving the participant the opportunity to provide the missing data.

If benefits are not calculated and certified, does the data contain all of the information necessary to calculate the benefits? Final benefits will need to be calculated, not estimated, for all participants.

Data is fluid and constantly changes. Participants move, die, quit, get married/divorced, and retire during the termination process. Ensuring and maintaining accurate data is key to preparing for a plan termination.

Communicating lump-sum windows

Lump-sum windows are common ways for defined benefit (DB) plan sponsors to shed pension liabilities. According to Milliman consultant David Benbow, effective communication is essential when employers consider offering of a lump-sum window. He offers his perspective in a recent Money Management Intelligence article.

Here is an excerpt:

Three things are necessary to make a lump-sum window successful: communication, communication, communication. In addition to the required legal notices informing participants of their rights, you should do your best to create a package that is eye-catching (not many people read their mail after it goes in the trash) and easy to read (if it reads like stereo instructions, people will jump to the election forms and make up their own rules). The communication should spell out the pros and cons of taking a lump sum so that the participant can make an informed decision. The last thing anyone wants is for a well-intended offer to turn into a class action because participants were misled.

It takes time to create a good communication package, and usually there will be several people who wants to take a whack at the piñata, including legal counsel. Just know that clear communication up front will reduce the number of questions and follow-up on the back end.

For more Milliman perspective on lump-sum distributions, click here.

Lack of guidance may extend “window” for lump-sum distributions

The Internal Revenue Service (IRS) has not issued the anticipated guidance pension plan mortality tables. A recent Bloomberg BNA article quotes Milliman’s Zorast Wadia discussing what plan sponsors must consider, or reconsider, if the IRS does not issue guidance in the coming months.

“The longer we go into 2016 without seeing the IRS issue guidance on new mortality tables,” the less likely such guidance will be issued this year and in place for plans to follow before 2018, said Zorast Wadia, a principal and consulting actuary in the benefits consulting firm Milliman’s New York office… sponsors may want to begin monitoring interest rates to determine the optimal time to offer lump-sum distributions, Wadia said.

Until recently, many plan sponsors and their advisers have been anticipating that these new mortality tables would be required for plans in 2017. The tables are expected to incorporate longer life expectancies and thus make it more expensive for sponsors to offer lump-sum payouts to participants. A delay in the required use of the tables could affect a sponsor’s decision on whether to offer a lump-sum window—a temporary opportunity to take benefits in that form—in 2016.

Wadia said the IRS must also decide whether its new guidance will incorporate the original base tables issued by the Society of Actuaries [SOA] in 2014 with their revised projection scales issued in 2015 or some other basis.

In a 2015 Benefits Law Journal article, Zorast offered perspective on how implementation of the new SOA mortality tables would reduce the accounting gains that are one of the key economic benefits associated with lump-sum distributions. Therefore, if the IRS does not issue guidance concerning mortality tables this year, plan sponsors may have an extended window to consider the potential benefits of offering lump-sum distributions. Any lump-sum offering would of course require a strong communication and education effort to ensure that plan participants are well equipped to make the important retirement decision that lies ahead.

To read the article, click here.

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.