Tag Archives: Maria Moliterno

Spot rate methodology: Plans are making the switch

Moliterno-MariaIn April, Milliman released its 2016 Pension Funding Study. The study looks at the 2015 year end GAAP accounting results for the 100 largest defined benefit corporate pension plan sponsors. A surprising feature of this year’s study is that 37 of the 100 companies in the study disclosed on their Form 10-K financial statements their intentions to value their 2016 net periodic pension cost results using an alternative spot rate method.

Under the standard method typically used for determining pension expense, the yield curve is used to first determine the present value of plan liability. A single equivalent discount rate is determined that produces the same liability. This equivalent discount rate is then used for all purposes in the expense calculation that requires interest adjustments, including calculation of interest and service costs.

The spot rate method is an alternative method to calculate interest and service costs. Calculating the plan’s liability under the spot rate method is similar to the standard method, as the yield curve is used to determine the liability as the present value of payout streams. However, under the spot rate method, costs are developed using the individual spot rates of the yield curve for each year of expected costs. The interest cost for the year is developed by applying each individual spot rate under the yield curve to each corresponding cash flow discounted to the beginning of the year. Because the current shape of the yield curve has low interest rates in the early years and higher rates over time, payouts expected in the next few years are valued at lower rates than in the future. For example, the December 31, 2015, Citigroup Yield Curve has a rate of 1.34% for year 1 and 4.54% for year 20.

With 37 of the 100 pension plan sponsors analyzed planning on adopting the spot rate methodology in 2016 for some or all of their plans, the change is expected to result in savings in the 2016 pension expense for them. According to the 2016 Pension Funding Study, if all 100 companies adopted the spot rate methodology for all of their plans, the 2016 pension expense savings is estimated to be $14 billion (assuming a 20% reduction in the interest cost for a typical company).

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2014 annual funding notice: Changes you need to know

Moliterno-MariaThe Highway and Transportation Funding Act of 2014 (HATFA) modified some of the content to be included on the 2014 annual funding notice (AFN) for single-employer defined benefit (DB) plans. Pension law requires employers that sponsor defined benefit plans to share certain financial information about the plan‘s funded status with plan participants via the AFN. Because the AFN due date is approaching for 2014 calendar-year plans, actuaries and plan sponsors should be aware of the necessary changes. The U.S. Department of Labor issued Field Assistance Bulletin (FAB) 2015-01 addressing updates to the 2014 AFN to reflect the application of HATFA.

In general, the AFN must be distributed to pension plan participants 120 days after the end of the plan year. Therefore, for calendar-year plans, the AFN must be distributed by April 30.

If a plan sponsor did not opt out of HATFA for plan year 2013 (“opt out” refers to the selection of the interest rate used to calculate the plan’s funding target) and had previously issued a 2013 AFN without reflecting HATFA, the 2013 AFN does not need to be revised or reissued to reflect the updates addressed in FAB 2015-01. However, the plan year 2013 results reflecting HATFA will need to be disclosed on the 2014 AFN.

Throughout the AFN, any references to Moving Ahead for Progress in the 21st Century Act (MAP-21) interest rates must refer to interest rates as amended by HATFA. A temporary supplement section was added to the 2012 AFN to disclose the effect of the change that is due to the MAP-21. Prior to HATFA, the temporary supplement was only required for applicable plan years beginning before January 1, 2015. Subsequent to HATFA, this temporary supplement is required for applicable plan years beginning before January 1, 2020.

An applicable plan year is defined as any plan year within the period in which the following three requirements are met:

1. The funding target under adjusted interest rates is less than 95% of the funding target without regard to adjusted interest rates.
2. The plan’s funding shortfall determined without regard to adjusted interest rates is greater than $500,000.
3. The plan had 50 or more participants on any day during the preceding plan year.

Previously, the first two items above were calculated using MAP-21 interest rates. Subsequent to HATFA, these same calculations are determined using HATFA interest rates. The wording on the supplement section of the AFN has replaced any references to MAP-21 rates with “adjusted interest rates.”

Prior to HATFA, if the value of plan assets was determined without regard to the MAP-21 interest rates, the AFN was to include a statement with the asset value and an explanation of how it differs from the value of plan assets used for funding purposes. Subsequent to HATFA, the Department of Labor rescinded this requirement after recognizing that it may result in complex requirements.
While most of the changes required by FAB 2015-01 are modest, they will still need to be reflected in the 2014 AFN. Be sure to update your 2014 AFN accordingly.

Top Milliman blog posts in 2014

Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.

20. Mike Williams and Stephanie Noonan’s blog, “Four things employers should know when evaluating private health exchanges,” can help employers determine whether a PHE makes sense for them.

19. Kevin Skow discusses savings tools that can help employees prepare for retirement in his blog “Retirement readiness: How long will you live in retirement? Want to bet on it?

18. The Benefits Alert entitled “Revised mortality assumptions issued for pension plans,” published by Milliman’s Employee Benefit Research Group, provides pension plan sponsors actuarial perspective on the Society of Actuaries’ revised mortality tables.

17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.

16. Milliman’s infographic “The boomerang generation’s retirement planning” features 12 tips Millennials should consider when developing their retirement strategy.

15. “Young uninsureds ask, ‘Do I feel lucky?’” examines the dilemma young consumers face when deciding to purchase insurance on the health exchange or go uninsured.

14. Last year’s #1 blog, “Retiring early under ACA: An unexpected outcome for employers?,” is still going strong. The blog authored by Jeff Bradley discusses the impact that the Patient Protection and Affordable Care Act could have on early retirees.

13. Genny Sedgwick’s “Fee leveling in DC plans: Disclosure is just the beginning” blog also made our list for the second consecutive year. Genny explains how different fee assessment methodologies, when used with a strategy to normalize revenue sharing among participant accounts, can significantly modify the impact of plan fees in participant accounts.

12. Doug Conkel discusses how the Supreme Court’s decision to rule on Tibble vs. Edison may impact defined contribution plans in his blog “Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

11. In her blog “Retirement plan leakage and retirement readiness,” Kara Tedesco discusses some problems created by the outflow of retirement savings. She also provides perspective on how employers can help employees keep money in their plans.

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PBGC variable rate premium: Should plans make the switch?

Moliterno-MariaMany pension plan sponsors are facing a decision on the methodology of calculating the premiums payable to the Pension Benefit Guaranty Corporation (PBGC) that may result in significant savings. PBGC premiums are made up of variable rate and flat rate premiums. Variable rate premiums are based on unfunded vested benefits (UVB). In 2014, many plan sponsors are eligible to change the methodology used to calculate their plan’s UVB. The question is: should they make the switch?

The UVB is determined by the amount that the vested liability, called the premium funding target, exceeds the fair market value of plan assets. The required variable rate premium for 2014 is $14 per $1,000 of UVB and is scheduled to increase to $24 in 2015 and $29 in 2016. The PBGC allows plan sponsors to determine UVB for purposes of calculating the variable rate premium by either:

• Using the three spot segment rates for the month preceding the month in which the plan year begins (standard premium funding target)
• Using the 24-month average segment rates as of the plan’s previously elected look-back period (alternative premium funding target)

Many plan sponsors elected for 2009 to switch to using the alternative premium funding target to avoid the volatile and low spot interest rates basis for the standard premium funding target.

Plan sponsors making the switch are locked into it for five years. After five years, the plan sponsor can switch again. If the plan sponsor doesn’t make a switch, they can stay with the current method as long as they like.

Five years later, plan sponsors who elected in 2009 to switch to using the alternative premium funding target are eligible to switch back to using the standard premium funding target. For calendar year plans, plan sponsors would need to do this in time for the PBGC premium due date of October 15, 2014. With the rise in interest rates that occurred during 2013, plan sponsors are asking themselves if they should make the switch during 2014.

To answer this question, consultants can estimate the variable rate premium amounts under both options for both the 2014 and 2015 plans. Does the plan sponsor save over the course of two years by switching methods?

Let’s look at an example for a sample plan with a UVB of $14.90 million under the alternative method and $9.75 million under the standard method for 2014:

For a calendar year plan, rates used for the standard premium funding target in 2014 are generally higher than the rates used for the alternative premium funding target; therefore, in this example, the standard premium funding target results in a lower variable rate premium for the 2014 plan year by $72,000.

Although interest rates for determining the alternative and standard premium funding target for the 2015 plan year are not yet available, if we assume the rates currently in effect stay constant through the end of the year, rates used for the alternative premium funding target are generally higher than the rates used for the standard premium funding target for the 2015 plan year. Assuming these rates are still in effect for the 2015 plan year, most plans will have a smaller premium funding target under the alternative method for 2015, resulting in a lower variable rate premium. In our example, the alternative method election would produce a more favorable result in 2014 by an amount of $33,000.

Therefore switching in 2014 to the standard premium funding target would result in a projected net savings of $39,000 over the two-year period.

Just remember, the standard method uses volatile spot interest rates. If there is another dip in the market, the plans may face higher costs under the standard premium funding target method and won’t be able to switch back to the alternative premium funding target until 2019. However, they will be happy they switched if interest rates rise but that of course is anyone’s guess!