The effect of COVID-19 has been devastating for some
businesses. In a relatively short amount of time, we’ve seen thriving
businesses brought to their knees—some closing temporarily or for good. Others,
anticipating a longer recovery period, are considering some difficult changes
such as laying off workers.
If your company is being forced to downsize or temporarily close, don’t forget that you can leverage your defined benefit plan during these difficult times. You can make the transition for your employees more palatable by:
Offering an early retirement window:During an early retirement window, you are able to offer enhanced benefits to encourage retirement. Consider offering medical benefits to bridge the gap and to make the offer even more worthwhile. Although an early retirement window reduces active participant cost, it can increase the cost of pensions paid over time (but is less problematic with well-funded plans).
Lowering Normal Retirement Age:Amending the plan to lower the Normal Retirement Age would allow employees to collect full retirement benefits earlier while working elsewhere. This should be carefully considered as you could risk losing high-quality workers to competitors, and a lower Normal Retirement Age becomes a permanent feature of the plan.
It’s possible you will need to consider more drastic action and close your doors permanently. If you are unable to fund, manage, or administer the plan, a plan termination is the likely scenario. In these unprecedented times, remember your defined benefit plan can ease the pain as you make difficult decisions such as workforce reductions.
As you consider taking action and want to discuss how you could leverage your defined benefit plan, contact your Milliman consultant.
This blog post is the second of a three-part series on workforce management during the coronavirus pandemic.
The coronavirus pandemic has completely changed the way Americans
work and live. Some employers have been on the front lines fighting the virus
head on, while others have been forced to close their doors temporarily or
If your company is one of the “essential” businesses with “essential” personnel – for example, in the healthcare industry – you may be immediately looking to increase the workforce to address the demand. Your older, more experienced employees, who may now be more critical than ever to your workforce, may struggle with the need to access retirement income and remain employed if hardship withdrawals from a defined contribution plan are not enough. Leverage your defined benefit (DB) plan to retain essential talent. Consider these strategies:
Offer in service distributions: The Secure Act recently allowed for in-service distributions as early as 59 ½. Amending the DB plan to allow for this could help retain key talent who might be tempted to leave just to get their pension benefits.
Waive suspension of benefits for rehired retirees: Rehiring retired professionals can be easier if you allow them to continue to collect their pension benefit. Amending the plan to temporarily waive the suspension of their benefits during re-employment could make returning to work very attractive.
Increase Normal Retirement Age: Amending the plan to increase Normal Retirement Age from 65 to 67 could help retain more experienced, needed talent at work. This change would be consistent with moves in other retirement ages to reflect longer life expectancies (Social Security Retirement Age and more recently, the Minimum Required Distribution Age).
Your DB plan can be an important tool in your toolkit as you respond to this crisis and work to retain key talent. Don’t forget to emphasize the advantages to your employees as you communicate the improvements. Working longer will increase DB for people who are accruing longer. And, if overtime, shift pay, or other forms of pay that are not base pay are included in pensionable compensation, pension benefits will reflect this additional pay.
For more details on how you can leverage your DB plan to even more effectively manage your workforce, contact your Milliman consultant.
This blog post is the first of a three-part series on workforce management during the coronavirus pandemic.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act will lead to technical and administrative actions that defined benefit (DB) pension plan sponsors should explore. In this article, Milliman’s Vanessa Vaag and Mary Hart summarize mandatory and voluntary changes arising from the SECURE Act related to human resource administration and DB plan calculations that plan sponsors must address.
Now that the presidential election is behind us, much of the political uncertainty that existed prior to the election has subsided, but uncertainty about the investment markets remains high. Interest rates spiked upward after the election and have continued moving higher. U.S. equity prices also spiked upward and have continued climbing. Now that we’re into December, plan sponsors are trying to gauge the impact of these recent events on end-of-year pension plan assets and liabilities. The longer-term impact of the Trump victory, however, is more difficult to predict.
President-elect Trump’s plans for corporate tax cuts, infrastructure spending, and deregulation are cited as some of the factors driving interest rates and expected inflation higher. The yield on the 10-year U.S. Treasury bond has increased about 50 basis points (0.50%) since the election, while the yield on the 10-year U.S. Treasury Inflation-Protected (TIP) bond has increased about 30 basis points (0.30%). The difference between the two yields, known as “breakeven inflation,” is a measure of inflation expectations. By this measure, expected average inflation over the next 10 years has increased by about 20 basis points (0.20%) since the election.
High-quality corporate bond yields—the basis for pension discount rates for accounting disclosure purposes—have increased by about 35 basis points (0.35%) since the election. If these yields remain at this level through the end of the year, plan sponsors could benefit from a drop of several percentage points in the value of their pension obligations (since the election), although yields are still below where they were at year-end 2015.
The Federal Open Market Committee (FOMC) is widely expected to raise its federal funds target interest rate when it meets this week. This would be the first increase since December 2015. It’s too early to predict whether this will be a single increase or the first of many increases over the next couple of years. If the Fed raises its target rate several more times, this could help support the recent spike in longer rates and possibly contribute to additional increases.
Defined benefit plan sponsors face a tremendous amount of uncertainty. With financial market volatility and liabilities essentially marked-to-market, understanding short-term risks and long-term trends under countless scenarios is invaluable.
Plan sponsors need to understand the impact of variations in asset returns, discount rates, contribution patterns, investment strategies, and plan design so that they can be prepared for potential effects on plan funded status, accounting costs, and contribution requirements. Understanding and planning for future possibilities is a must. That is why many sponsors are turning to Milliman’s FutureCost.
FutureCost is an interactive model that provides short- and long-term projections of key financial metrics, helping decision makers prepare for what could be right around the corner as well as for what could lie further down the road. The results are easy to produce and review, with both graphical and numerical outputs generated.
Whether looking at a few deterministic projections to illustrate the sensitivity to changes in asset or liability measures of contributions requirements or accounting results, or doing a full stochastic model with thousands of scenarios to assist in the implementation of a liability-driven investment strategy, FutureCost can help sponsors make important decisions, keeping their eyes open to the potential outcomes.
To see an example of data generated by FutureCost, play the video above or click here.
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