Tag Archives: pension risk management

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.

Integrated risk management roundtable for Dutch pension funds

Milliman has organized a roundtable discussion to explore integrated risk management (IRM) for Dutch pension funds, for Wednesday, 27 September 2017, in Amsterdam. While the Dutch National Bank (DNB) devotes a lot of attention to IRM and expects pension funds to have a structured approach, we find that many funds have difficulty formalising one.

At this roundtable, Milliman consultants will discuss the following:

• What is IRM and what does it entail?
• What are common IRM strategies and policies for Dutch pension funds?
• How can the pension board perform a thorough risk assessment?
• How can the board ensure proper commitment to IRM?
• How can the board ensure adequate monitoring and evaluation?
• How can the board ensure that the DNB is satisfied with a fund’s IRM?

Seats are limited. If you would like to attend, email us here for more information.

Roundtable on UK defined benefit pension schemes

MBW International, a UK-based joint venture between Milliman and Barnett Waddingham, has organised a roundtable discussion entitled “UK defined benefit pensions, a current overview: What can we learn in the Netherlands?” on Tuesday, 3 October 2017.

The roundtable is aimed at Dutch companies with a deficit in their UK defined benefit (DB) pension schemes as well as companies interested in learning more about the latest UK pension developments.

The roundtable will focus on the following topics:

  • An update on the UK pensions market and the impact it is having on Dutch companies—this will include recent analysis by the leading UK actuarial firm Barnett Waddingham LLP (the analysis will be distributed at the event).
  • Current market opportunities which could help companies tackle their UK pension problems, including:
  1. Changes to the way UK employees can access their pension savings that make it more attractive for them to transfer DB benefits into defined contribution (DC) arrangements. This helps reduce the scale of the historic DB obligations.
  2. Continuing developments in the UK bulk annuity market.
  • What can we learn in the Netherlands from our UK counterparts?
  • Management of international pension plans—how can this be done in a more harmonised manner to increase efficiency, reduce risk, and achieve greater consistency across a business.

MBW International Directors Nick Griggs and Andrew Vaughan are guest speakers. Both Nick and Andrew have considerable experience dealing with these UK pension issues.

Seats are limited. If you would like to attend, email us here for more information.

Potential solutions for reducing PBGC premiums

Defined benefit (DB) plan sponsors continue to seek options to reduce their Pension Benefit Guaranty Corporation (PBGC) premiums, especially the variable rate premium. Milliman actuary Bret Linton highlights the following three solutions for plan sponsors to consider in his article “The challenge: Reducing PBGC variable rate premiums.”

1. Additional contributions, credited to the prior plan year.
2. Borrowing capital at a lower interest rate than the PBGC variable rate.
3. Splitting the pension plan into two plans: one with only actives and a second with the remaining retirees and terminated vested participants.

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.