Tag Archives: pension funding relief

COVID-19 gives rise to multiemployer pension funding relief considerations

Now that the United States Congress has passed another COVID-19 stimulus bill, attention has shifted to the next phase, which could include legislation directly affecting multiemployer pension plans. Addressing system-wide changes is a difficult undertaking as history has shown that sometimes pension reform measures have the unintended consequence of negatively affecting the defined benefit system. This Multiemployer Alert by Milliman’s Joel Stewart and Yutaro Seki provides a summary of past multiemployer pension funding relief as well as recent proposals.

Uncertainty persists for multiemployer pension plans

Many multiemployer pension plans will not be able to pay the full value of promised benefits to future retirees, and additional measures will be needed in order for them to do so. An immediate concern is the Pension Benefit Guaranty Corporation’s multiemployer trust fund, which is expected to be exhausted by 2025, following the projected insolvency of the Central States, Southeast & Southwest Areas Pension Plan and several other deeply troubled plans that are expected to become insolvent during the next six to seven years. These concerns led to the formation of the Joint Select Committee on Solvency of Multiemployer Pension Plans. In November, a Joint Select Committee deadline to propose a solution came and went, with the committee chairs indicating the committee will continue its work toward a bipartisan solution. This Milliman Multiemployer Alert offers some perspective.

Oh, what a relief it is!… isn’t it?

Now that employers have elected the funding relief that came with the recently enacted Moving Ahead for Progress in the 21st Century Act (MAP-21), they may have gotten more than they bargained for. Yes, the new law has provided defined benefit (DB) plans with temporary relief that means considerably smaller pension contributions in the short term, but there are strings attached.

If plans didn’t opt out of the relief for pension administration purposes, their newly improved funded status could bring with it some administrative headaches. The key measurement of a plan’s funded status is the adjusted funding target attainment percentage (AFTAP), and when the AFTAP goes below certain levels, different restrictions may kick in:

As plan funding has become worse over the last few years, many plans found themselves moving down the chart and implementing restrictions.

Now, thanks to MAP-21, they may see themselves moving back up the chart and having to undo what they’ve done. As soon as the new AFTAP is certified, the plan may find itself in a new situation and, in some cases, having to retroactively reinstate benefits.

Moving above 60%
Plans that cross the 60% threshold will have to unfreeze plan accruals prospectively (plans may be amended to restore “lost” accruals). “Accelerated” options, such as lump sums and level incomes, will immediately become available only on a limited basis (generally 50%).

If the plan was prevented from paying unpredictable contingent event benefits, they will become payable retroactively.

Moving above 80%
If the MAP-21 relief moves the plan above 80%, the plan will have to start offering any accelerated forms of payment that it had previously restricted. Furthermore, participants should be notified that these options are now fully available. Be prepared for participants who received partial lump sums during the restricted period to come looking for the other half. We’re in uncharted waters now, so you may want to chat with the plan’s actuary to determine the best way to calculate the remaining lump sum.

The plan can also be amended to increase benefits as long as the increase doesn’t bring the plan below 80% funding.

Looking ahead
The MAP-21 relief was designed to wear away after a few years, in the hope that, by that time, the economy will have rebounded, plan asset levels will have improved, and plan contributions will be much lower. If that doesn’t happen (for example, see Tim Herman‘s article about the fiscal cliff), the same plans that just moved out of restrictions will find themselves falling back in again.

Oh, MAP-21, you’ve saved us! So now what?

Does this sound familiar? Last year, the funding level for the company’s retirement plan was only 72%. Benefits were restricted, participants were grumbling, and the CFO was wondering why millions of dollars were being shoveled into a frozen defined benefit (DB) plan.

Then, suddenly, the Moving Ahead for Progress in the 21st Century Act (MAP-21) swoops in and saves the day. Now the plan is at 87% funding. Whew! What a relief!

Um… So what comes next?

We should use the time to our advantage.

Administratively, there are a few wrinkles to iron out. Just as you had to notify participants that their benefits were being restricted, you may now have to notify them that those restrictions have been lifted. If your plan offers lump sums or level income options, and you did not opt out of the MAP-21 relief for benefit restrictions, those payment options are back on the table because the plan is now over 80% funded. Furthermore, if you paid participants 50% of the restricted benefits, those participants will probably be knocking on your door looking for the other half. You should be prepared to calculate those amounts and distribute them.

Also, remember that the new funding relief is only temporary. The MAP-21 increase in interest rates will wear away, resulting in higher liabilities down the road, unless interest rates rise. The hope is that by the time we get there, the economy will be on the rebound and plan assets will also be high enough to prevent huge pension contributions. But if this doesn’t happen, we’ll be paying later what we’re avoiding now.

Finally, even though the plan’s funding level has improved (at least on paper), the Pension Benefit Guaranty Corporation (PBGC) still requires that premiums be based on the pre-MAP-21 interest rates. This means that the calculation of the variable PBGC premiums will not reflect the MAP-21 improvements in the unfunded liability, and what’s more, PBGC premium rates will be increasing over the next few years.

So even though we can breathe a collective sigh of (funding) relief, we shouldn’t be too complacent. As with Aesop’s fable of the grasshopper and the ant, it’s best to get our houses in order before winter arrives.

Pension funding relief elections may require immediate action

Milliman has released a new Client Action Bulletin (CAB) looking at single-employer pension funding relief elections. Plan sponsors have only a brief window to formally make an election for either the 2009 or 2010 plan year.

This new CAB focuses on the IRS’s guidance on electing the relief, the calculation of the reduced contribution, and the notifications. You’ll find the new CAB here.