Tag Archives: Grant Camp

The Multiemployer Pension Recapitalization and Reform Plan considerations

On November 20, 2019, Senators Charles E. Grassley and Lamar Alexander released a white paper and accompanying technical explanations describing their proposed Multiemployer Pension Recapitalization and Reform Plan, which is their strategy to address the projected insolvency of approximately 125 multiemployer pension plans and the projected failure of the Pension Benefit Guaranty Corporation (PBGC) multiemployer program, which is intended to backstop insolvent pension plans. This article by Milliman’s Ryan Rowland and Grant Camp summarizes key aspects of the proposed legislation.

VAPPs: Coming soon to a retirement plan near you?

Camp,-GrantThe Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

As previously written about on this blog in April 2014 and May 2013, variable annuity pension plans (VAPPs) are regaining interest for retirement plan sponsors because their structure combines many of the strengths of traditional defined benefit plans with the strengths of traditional defined contribution plans.

Defined benefit plan features of VAPPs
As with traditional defined benefit plans, benefits in a VAPP are paid for the lifetime of the participant and beneficiary. While the level of the benefit may not be guaranteed, stabilization strategies exist to dramatically reduce the possibility of retiree benefit declines and the participant does not need to worry about running out of money during retirement. VAPPs pool longevity risk within the plan and have professional asset management like a traditional defined benefit plan, enabling the plan to provide larger average benefits per dollar contributed compared to individually directed defined contribution accounts. These defined benefit plan characteristics are desirable for employers looking to attract and retain top talent.

Defined contribution plan features of VAPPs
As with defined contribution plans, VAPPs have controllable employer costs and no funding surprises. VAPPs maintain their funded status in all market conditions, which eliminates concerns about underfunding. This means that plan sponsors can set a target contribution level such as a fixed dollar amount or fixed percentage of pay, similar to a defined contribution plan. Additionally, participants participate in market upside, providing a portable benefit (meaning that a participant is not harmed by switching jobs mid-career) and expected inflation protection during retirement.

To learn more about VAPPs, visit this reading list.





Variable annuity pension plan reading list

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Variable annuity pension plans (VAPPs) are hybrid retirement plans that provide employers an alternative design to the traditional defined benefit (DB) plan and the defined contribution (DC) plan. VAPPs can stabilize contributions for sponsors while offering participants lifelong income. This reading list highlights various information related to VAPPs.

• “Retirement risks side-by-side: DB vs DC vs VAPP”
In this video blog, I discuss the retirement risk allocation between a plan sponsor and the plan’s participants in a variable annuity pension plan (VAPP) structure compared with risk analyses associated with traditional defined benefit plans and defined contribution plans. I also explain how a VAPP can reduce inflation, portability, and interest rate risks.

• “Benefits side by side: DC vs DB vs VAPP”
VAPPs provide secure, lifelong, inflation-protected retirement benefits. VAPPs combine the best of what traditional DB plans do regarding longevity protection and lifelong income and what DC plans do to combat inflation. In this second video presentation, I explain the advantages for retirees of VAPPs compared to more traditional plan structures.

• “Plan funding side by side: Traditional DB and VAPP”
VAPPs provide lifelong inflation-protected benefits to participants. VAPPs can also stabilize plan contributions for employers. In this video presentation, I discuss how funding a VAPP compares with funding a traditional pension plan. The presentation also touches on how Milliman helps plan sponsors stabilize benefits for retirees through reserves.

• “Employee communication: Transition to a VAPP
Some employers have considered switching their current retirement plan to a VAPP. Communicating the change in retirement benefits can be a challenge for plan sponsors. This blog, written by Milliman’s Heidi tenBroek, features a video that explains to employees how a VAPP works, how it affects their benefits, and why it is a stable retirement solution for them and their employer.

• “Milliman infographic: Variable annuity pension plan
The VAPP design combines features from traditional DB plans along with features from DC plans. This infographic illustrates specific retirement plan sponsor needs that VAPPs help address.

• “VAPPs: Coming soon to a retirement plan near you?
In this blog, Milliman consultant Grant Camp summarizes the DB plan and DC plan features of VAPPs.

• “Milliman Hangout: Variable annuity pension plans (VAPPs)”
Camp and I talk about VAPP features in this video. They also discuss the value VAPPs offer sponsors and participants.

“Making the case for variable annuity pension plans (VAPPs)”
VAPP retirement benefits increase or decrease depending on whether a plan’s investments return more or less than the established “hurdle rate.” A benefit stabilization strategy preserves funding stability and diminishes benefit declines. Camp and I discuss the strategy in this article.

“Making the case for variable annuity pension plans (VAPPs): Basic VAPP benefits and design strengths”
This article provides examples of how a retiree’s basic VAPP benefits would change over different historical periods. The article also details the strengths and weaknesses of the VAPP design.

“Making the case for variable annuity pension plans (VAPPs): Stabilized VAPP benefits”
In this article, Camp, Ladd Preppernau, and I discuss the stabilized VAPP model. The design involves building a reserve, spending the reserve in down markets to prevent benefit decreases, and improving benefits if the reserve is larger than is required to prevent benefit decreases.

Making the case for variable annuity pension plans (VAPPs): Shared retirement risks: How VAPPs stack up
There are four main risks associated with retirement plans: investment risk, interest rate risk, inflation risk, and longevity risk. This article, authored by Camp, Preppernau, and I provides perspective on how VAPPs address these risks.

“A balanced approach to retirement risk”
VAPPs address several sponsor concerns like funding and accounting volatility. The design also helps alleviate participant concerns related to money management and inflation. Milliman’s Camp offers more perspective in this blog.

“Variable annuity plans may benefit employers and employees”
In this blog, Milliman’s Ryan Hart provides a chart comparing and contrasting VAPPs alongside DC plans and traditional DB plans.

“Variable annuity pension plans: An emerging retirement plan design”’
In this article, Mark Olleman and I provide historical scenarios of how retirees’ benefits would vary over time under a VAPP structure.

“Variable Annuities: A retirement plan design with less contribution volatility”
Multiemployer plan trustees seeking sustainable ways to provide participants with lifelong benefits that allow for more predictable contributions may want to consider the VAPP design. This paper by Olleman, Preppernau, and I explains the advantages that VAPPs offer single and multiemployers and their employees.





Milliman Hangout: Variable annuity pension plans (VAPPs)

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Retirement security is tricky. Traditional defined benefit plans have contribution volatility that is difficult for sponsors to manage. Defined contribution plans typically do not provide participants with stable, lifelong income. Variable annuity pension plans (VAPPs), however, combine the best of both worlds—better meeting the needs of sponsors and participants. Sponsors get stable contributions like defined contribution plans and participants get lifelong income like defined benefit plans.

Milliman consultants Kelly Coffing and Grant Camp discuss some of the benefits that VAPPs offer sponsors and participants in this Milliman Hangout.

For more perspective on VAPPs, click here.





A stabilization reserve could ease possible declines in VAPP benefits

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Variable annuity pension plans (VAPPs) have a lot going for them. They stay fully funded and have contribution and accounting stability like 401(k) plans. However, benefits increase or decrease depending on whether a plan’s investments return more or less than the set “hurdle rate.” With a basic VAPP, retirees will experience decreases in their benefits some years, but there is a benefit stabilization strategy that maintains the funding stability and dramatically diminishes benefit declines. Milliman’s Grant Camp and Kelly Coffing provide some perspective on this strategy in their article “Making the case for variable annuity pension plans (VAPPs).”

Here is an excerpt:

A stabilization reserve is built to keep benefits level during down markets. We call it the cap and shore-up method:

Build a stabilization reserve (by capping benefit increases in high return years).

A stabilization reserve could be developed in several ways. Two possibilities are described below:

  • Limit VAPP benefit increases to a certain maximum increase per year, say 10%. When the plan’s investment return would result in benefit adjustments greater than 10%, benefits would only increase by 10% and the excess return would be used to build a reserve.
  • Build the reserve with a portion of the return directly above the hurdle rate. For example, if the hurdle rate is 4%, do not provide benefit increases on the portion of the return between 4% and 5%. Benefits would only increase when returns are greater than 5%.

Spend the reserve in down markets to prevent benefit decreases (shoring-up benefits).

When benefits would otherwise decrease, use a portion of the stabilization reserve to prevent benefit reductions. The intent is to protect each retiree’s high-water mark (i.e., the highest level of monthly benefit received in retirement) to the greatest extent possible.

For example, if a retiree’s underlying VAPP benefit decreases from $1,000 to $900 per month, the stabilization reserve would provide $100 a month to shore up the benefit, maintaining a total benefit of $1,000 per month. The retiree has not had his benefit payment decrease.

The next year, the underlying VAPP benefit of $900 per month will be adjusted based on the plan’s investment return. If the underlying benefit exceeds the prior high-water mark of $1,000 per month, the underlying benefit is paid (this becomes the new high-water mark) and no payment is made from the reserve. However, if the underlying benefit is still less than the prior high-water mark, a portion would again be paid from the reserve.

Figure 4 from the article illustrates how a retiree’s basic VAPP benefit would have performed compared to a stabilized VAPP benefit from 1984 to 2013.

 





What to look ahead for in pension risk management

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Defined benefit plan sponsors are concerned about contribution and funded status volatility. Some recent pension risk management strategies have focused on liability-driven investing (LDI) and lump-sum distributions. In this article, Milliman consultants Tim Connor, Scott Preppernau, and Zorast Wadia discuss in general terms methods that plan sponsors may implement to de-risk their pensions moving forward.

Here is an excerpt:

We suspect that 2014 will see a continued trend of sponsors looking to de-risk their plans through the various methods mentioned above. In addition, we believe sponsors will investigate the benefits of a hybrid plan design such as the variable annuity plan for the reasons mentioned above.

Another trend likely to continue is the implementation of lump-sum windows or permanently increased lump-sum thresholds. These strategies have found favor with many plan sponsors, particularly in response to recent increases in Pension Benefit Guaranty Corporation (PBGC) premiums. Because PBGC premiums include a per-participant charge, and because that charge has increased substantially in recent years, sponsors will no doubt continue to take a hard look at the idea of offering lump sums if it translates into fewer participants for whom they must pay those premiums. In addition, the rates utilized to pay out lump sums have been fully phased in for a few years now, from the previous basis of 30-year Treasury rates. That old basis resulted in a period of time where lump sums were seen as costly to sponsors. That is no longer the case. On a U.S. GAAP accounting basis, plans are valuing liability at rates that are close to the rates that are now utilized to pay lump sums. In other words, there is no longer much of an accounting gain or loss to a plan that pays out a lump sum. Yet, it does accomplish de-risking by transferring management of the pension to the participant.

On the investment side, we also expect sponsors to explore some nontraditional de-risking solutions. Not all sponsors share the belief that leaving the space of equity investments makes sense in the long term. Some feel they can’t afford not to be seeking returns in the market. For them, a tail risk hedging investment strategy can be an attractive de-risking solution. A typical strategy allows for upside through equity investments, while at the same time mitigating downside losses that occur in volatile, declining markets. The concept of hedging tail risk is quite familiar to the insurance industry, which utilizes such strategies to manage its own risk in guaranteeing certain products, such as variable annuities. It makes natural sense for defined benefit plan sponsors to incorporate the approach to de-risk their own pension promises.

Read Grant Camp and Kelly Coffing’s article Making the case for variable annuity pension plans (VAPPs) to learn more about the variable annuity pension plan design. Also, for more Milliman perspective on lump-sum distributions, click here.