Tag Archives: Tim Herman

Implementing GASB 75 rules

In 2016, new Governmental Accounting Standards Board (GASB) rules were implemented for postemployment benefits other than pensions (OPEB). Other rules are scheduled to go into effect this year.

Successful implementation of the new rules requires an understanding of various technical concepts related to newly required calculations. In this PERiScope article, Milliman’s Tim Herman discusses the allocation of financial reporting liabilities and expenses for cost-sharing multiple-employer OPEB plans under GASB 75.

This article is part of Milliman’s Governmental Accounting Standards Board (GASB) 73/74/75 series.

Paying a lump sum to retirees in a lump-sum window? “Not so fast my friend”

Herman-TimOn July 9, 2015, the Internal Revenue Service (IRS) announced that the U.S. Department of the Treasury and the IRS intend to amend regulations to prohibit qualified defined benefit plans from paying lump sums to retirees and beneficiaries in a lump-sum window. In Notice 2015-49, the IRS reported that its intent is to have the amendments to regulations apply as of July 9, 2015, except in certain situations described below.

What does this mean?
Many pension plan sponsors have provided a lump-sum window offer to deferred vested participants, and some of these sponsors have included retirees and beneficiaries in the window. After July 9, 2015, plan sponsors will not be permitted to offer lump sums to retirees or beneficiaries in a lump-sum window unless the amendment satisfies one of the exceptions below. However, there is nothing included in the IRS Notice that would preclude offering a lump sums to deferred vested participants.

Exceptions
The amendments to the regulations are intended by the IRS to apply as of July 9, 2015. However, the amendments will not apply to a plan amendment for a lump-sum window in one of the following four situations:

1. If the amendment is adopted or authorized prior to July 9, 2015.
2. An amendment where a private letter ruling or determination letter was issued by the IRS prior to July 9, 2015.
3. Where written communication to participants stating an “explicit and definite intent” to implement a lump-sum window was received by participants prior to July 9, 2015.
4. Adopted pursuant to a collective bargaining agreement between the plan sponsor and a union prior to July 9, 2015.

If the amendment satisfies one of these four exceptions, then a lump-sum payment in lieu of future annuity benefits for retirees and beneficiaries appears to be allowed.

Plan termination
It is not clear whether or not the IRS intends to prohibit defined benefit plans from paying lump sums to retirees and beneficiaries when a pension plan is terminated. This issue will need to be clarified when the amended regulations are published by the IRS.

Observations on regulatory action
Earlier this year, the U.S. Government Accountability Office (GAO) issued a report entitled “Participants need better information when offered lump sums that replace their lifetime benefits,” and the Pension Benefit Guaranty Corporation (PBGC) announced its plans to begin collecting data on pension plan de-risking measures. In a surprising move, IRS Notice 2015-49 was issued on July 9, 2015, with an intended effective date of July 9, 2015. There was little or no indication of pending guidance from the IRS or any indication that the IRS is open to feedback on the notice. This is unlikely to be the last step in the regulation of lump-sum windows.

Please contact a Milliman consultant to discuss how this notice might impact your intentions to offer a lump-sum window.

UPDATED: PBGC will collect data on pension plan de-risking measures

Herman-TimThe 2015 premium filings to the Pension Benefit Guaranty Corporation (PBGC) requires the reporting of information about the de-risking activities of pension plans as part of their annual premium payment filings. The data set includes participant counts split between participants in and not in pay status for both lump-sum windows and annuity purchases in the last two years. For lump-sum windows, the participant counts include those eligible for the window and the actual number who elected a lump-sum under the window. For annuity purchases, the participant counts are limited to those for whom an annuity was purchased. If accurate data are not available, then reasonable estimates are acceptable. Finally, data are not required to be reported if the lump-sum window closed or the annuity purchase was made less than 60 days before the premium filing is made. So for a calendar year plan that files the 2015 premium filing on October 15, 2015, the information to be provided encompasses de-risking activities from January 1, 2014, through August 16, 2015.

It will be interesting to watch what the PBGC does with the information it collects. According to the PBGC, it is interested in collecting this data because “information about risk transfers is critical to PBGC’s ability to assess its future financial condition.” Back in 2013, Joshua Gottbaum, then executive director of the PBGC, reported to the ERISA Advisory Council that pension plan lump-sum cash-outs to retirees are like cigarettes: they are legal, many people like them, and they are bad for you. With the current financial condition of the PBGC and its role in protecting participants’ pension rights, it may be that the PBGC is interested in providing more detailed regulation on the de-risking activities of pension plan sponsors.

During the past several years, we have seen many of our clients undertaking both lump-sum windows and looking into annuity purchases. For the 2014 year-end accounting disclosures, historically low interest rates combined with updates to mortality assumptions have driven up the calculated pension obligations. As a result, companies will be reporting very large pension deficits on their balance sheets. Because of the impact of pension plans’ funded status on corporate financial statements, the interest of companies in de-risking activities will continue and may even increase from prior levels.

Please contact a Milliman consultant to discuss if lump-sum windows are right for your situation.

HATFA-14 provides opportunities to reduce 2013 and/or 2014 cash contributions and 2014 PBGC premiums

Herman-TimThe recently enacted Highway and Transportation Funding Act of 2014 (HATFA-14) provides opportunities for plan sponsors to reduce cash contributions and Pension Benefit Guaranty Corporation (PBGC) premiums. For the approaches that involve contributions for the 2013 plan year, prompt action is needed to ensure the applicable funding requirements are satisfied. For calendar year plans, the final date to designate cash contributions and/or add excess contributions to the prefunding balance for the 2013 plan year is September 15, 2014.

HATFA-14 opportunities
1. Reduce cash contributions required for the 2013 plan year.
• Plan sponsors may optionally revise the 2013 actuarial valuation (absent an election to opt out of the HATFA-14 relief for 2013).
• With the use of the higher interest rates for the cash funding valuation, the minimum required contribution may be lower.

2. Reduce cash contributions required for the 2013 and 2014 plan years.
• Plan sponsors may optionally revise the 2013 actuarial valuation (absent an election to opt out of the HATFA-14 relief for 2013).
• Plan sponsors are required to revise the 2014 actuarial valuation.
• With the use of the higher interest rates for the cash funding valuations, the total minimum required contributions (combined 2013 and 2014 plan years) may be lower.

3. Reduce 2014 PBGC variable rate premiums.
• Revise the 2013 actuarial valuation to reduce the minimum funding requirements for the 2013 plan year.
• Revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year.
• Confirm that contributions are sufficient to satisfy both 2013 and 2014 minimum funding requirements.
• Designate some or all of the cash contributions previously used for the 2014 plan year as receivable contributions for the 2013 plan year.
• This reduces the unfunded liability for PBGC variable rate premium.

4. Manage credit balances for 2013 and 2014 plan years.
• Revise the 2013 actuarial valuation to reduce the minimum funding requirements for the 2013 plan year.
• Revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year.
• Confirm that contributions are sufficient to satisfy both 2013 and 2014 minimum funding requirements.
• Create and use credit balances to optimize the plan sponsor’s use of cash.

Some plan sponsors may decide forgo the opportunities provided by HATFA-14. One example is a plan sponsor with planned cash contributions to reach a specified funding threshold. These plan sponsors will still need to revise the 2014 actuarial valuation to reduce the minimum funding requirements for the 2014 plan year (required). However, they may elect to opt out of the HATFA-14 relief for 2013 and satisfy 2013 plan year minimum funding requirements by making contributions based on the 2013 actuarial valuation results prepared under the Moving Ahead for Progress in the 21st Century Act (MAP-21) rates.

Cash savings opportunities under HATFA-14 will vary by a plan’s funded status, amount of credit balances available, etc. Also, different plan sponsors will have different goals and objectives regarding cash funding to the pension plan. Your Milliman consultant can help you review the opportunities that are available and decide on a course of action that is appropriate for your situation.

Pension plans: How’s that de-risking going?

Herman-TimCorporate pension plans had a good year in 2013. The Milliman 2014 Pension Funding Study reported a $198.3 billion improvement in the funded status deficit during 2013. This improvement was due to a win-win situation where there was a 7.5% decrease in plan liabilities from higher discount rates and a 9.9% average return on plan assets.

There are a few interesting pieces of information that can be gleaned from the Pension Funding Study about plan sponsors that have made moves to de-risk their pension plans.

• In general, the asset allocations of the plans in the study have shifted toward a higher allocation of fixed income investments. However, some plan sponsors have retained a more traditional asset mix.

• In 2013, plan sponsors with higher allocations to equities experienced greater improvement in pension funded status than those with lower exposures to equities.

• Some plan sponsors who undertook de-risking activities such as lump sum payouts or annuity purchases may need to increase cash contributions to maintain funded status.

  • For example, Ford was one of the companies that undertook de-risking activities in 2012. Its 2013 contribution increased by more than $1.6 billion.

• There are 22 pension plans in the Milliman 100 index that had asset allocations to fixed income investments over 40% in 2009. Since 2009:

  • These 22 plans experienced significantly lower funded ratio volatility than the other 78 plans.
  • From 2010 through 2012, these plans earned higher average annualized returns.
  • Until 2013, this strategy paid off for these plans in terms of reducing funded status volatility.

• For the plans that did not increase asset allocations to fixed income investments, the combination of higher interest rates to discount liabilities with favorable returns on assets led to a significant improvement in their funded ratios.

What are the morals of the story? De-risking pension plans may provide advantages to plan sponsors in reductions in funded status volatility. But these advantages may come at the price of higher cash contributions and missing out on favorable moves in the market.

With budget accord comes higher PBGC premiums

Herman-TimThe budget accord announced by House Budget Committee Chairperson Paul Ryan (R-WI) and Senate Budget Committee Chairperson Patty Murray (D-WA) includes increases to Pension Benefit Guaranty Corporation (PBGC) premiums. The increases in PBGC premiums are in addition to the increases that were previously included in the Moving Ahead for Progress in the 21st Century (MAP-21) legislation that was passed in 2012. The following table shows the revised premium rates:

MAP-21 rate Budget Accord
Year Flat-rate premium Variable-rate premium Flat-rate premium Variable-rate premium
2014  $49.00  $14.00  $49.00  $14.00
2015  $49.00 *  $19.00 *  $57.00  $24.00 *
2016  $49.00 *  $19.00 *  $64.00  $29.00 *
* Subject to indexing based on the national wage index for Social Security

The flat-rate premium is a per-participant amount, and the variable-rate premium is a dollar amount per $1,000 of unfunded vested benefits. For a plan with 1,000 participants and $10,000,000 of unfunded vested benefits in 2015, the effect of the increase in PBGC premium rates will be to increase the 2015 PBGC premium by about $58,000 (from $239,000 to $297,000). If there were no change in participant count or unfunded vested benefits in 2016, the effect of the increase in PBGC premium rates will be to increase the 2016 PBGC premium by about $115,000 (from $239,000 to $354,000).

The increases in PBGC premiums are expected to help reduce PBGC’s $36 billion deficit. The House has passed the measure. The Senate is expected to vote on the measure by December 18. Approval is expected, and the president indicated he would sign the bill.

If the increases in the PBGC variable-rate premiums are a concern to plan sponsors, it will be prudent to review contribution and investment policies. To the extent possible, it will be advantageous to plan contributions to reach a 100% funding ratio on a PBGC variable-rate premium basis by 2015 to avoid PBGC variable rate premiums, and to adopt investment policies designed to maintain a 100% funding ratio once it’s reached. Consideration may be given to other derisking measures such as cashing out separated vested participants in 2014. In particular, it may make sense to complete a cost/benefit analysis for “small” benefits in light of the increases in premium rates.