In the News: BCG Pension Risk
Consultants' Michael Devlin on
Pension Risk Transfers and
De-Risking Strategies*
Managing Growing PBGC Premiums*
PlanSponsor | October 02, 2018
How do plan sponsors do that, and
have they already taken steps to do so?
When the Bipartisan Budget Act of 2015 was signed into law in November 2015, it
extended pensions stabilization rules for three years, making it
easier for defined benefit (DB) plan sponsors to get approval to
use mortality tables other than that prescribed by the U.S. Treasury, but it also increased, once
again, the Pension Benefit Guaranty Corporation (PBGC) fixed and
variable-rate premiums.
The flat-rate premium for PBGC insurance coverage of
a pension funding shortfall increased by another 25% over the following three years, while the
variable rate will rise closer to 35%. This means annual
fixed-rates by 2019 will rise to $80 per participant, while the
variable rate will rise to 4.1% on unfunded vested benefits.
For example, take a plan with 2,000 retirees with
500 of those retirees receiving a pension from this plan of less
than $2,000 per year. The expenses alone to keep them in the
plan, including PBGC premiums, are approximately $300 per year.
The rising pension funds are definitely scaring plan
sponsors, says Robin Solomon, partner, Ivins, Phillips &
Barker in Washington, D.C. “Plan sponsors are trying to
reduce head count in order to lower PBGC obligations,” she says.
“This year, in particular, we’ve seen record stock market
returns. Most categories of equities have had positive returns so
far this year and plan funding has benefited as a result.”
But there is another side of this equation, Solomon
says, namely “interest rates, which are used to calculate pension
liabilities. Even though the stock market has gone up, pension
funding has not improved that much because interest rates have
remained unusually low for a long period of time.”
David Hinderstein, president of Strategic Retirement
Group, Inc. in White Plains, New York, says, “PBGC premiums are
still front and center for each plan sponsors overall expenses on
the DB plan along with taxation and funded status and finding
ways to de-risk their DB liabilities.
“The more aggressive steps you can you can take to
eliminate expenses on a traditional DB plan the go directly to
the improved funding status,” he says. “But in addition, small
balance cash outs, lump sum offerings and aggressive pension risk
transfer (PRT) to insurance companies have also increased as plan
sponsors have a greater understanding of their liabilities.”
Pension Risk Transfers
The reason there are more PRT lump sums or buyouts
is not only about the PBGC rate increases, according to Michael
E. Devlin, Principal, BCG Pension Risk Consultants, in
Boston. “Funding levels are the best they’ve been pre-2008
due to the rise in the stock market,” he says.
In addition, “There is the combination of interest
rates increasing and the implementation of the new Internal
Revenue Service (IRS) mortality tables, which reflect a longevity
measurement more in sync with insurance carrier assumptions. Tie
this in with increased PBGC fees, and you see why plan sponsors
are actively exploring and implementing these de-risking
strategies.”
When plan sponsors de-risk, Devlin explains,
they no longer have to pay for several expenses such as: the
custodian on the account, the issuing of the 1099, the PBGC fees,
plus the plan has eliminated the stock market risk, longevity
risk, and interest rate risk.
Devlin says that companies like BCG Pension Risk
Consultants, Mercer and Willis Towers Watson had been
annuitizing DB funds on a plan termination basis, and now we’re
seeing a tremendous amount of plan sponsors doing it on a
non-termination basis. Click Here for full article
A Note
From Alexandra Hyten -
Prudential
Perspectives in Pension De-Risking
Alexandra Hyten Vice President, U.S. Pension Risk
Transfer
The dog days of summer may be behind us, but the
pension risk transfer pipeline is still hot! Many plan sponsors
increased pension contributions by September 15, and we’ve
also seen the highest sales total on record for the past 15 years
in the second quarter.
In fact, over $10 billion of pension liabilities
have been settled so far in 2018. With demand for risk transfer
solutions on the rise, and pension buy-outs top of mind, it’s
important for plan sponsors and advisers to take the appropriate
steps to begin preparing now. Equally important is selecting an
experienced team of professionals who can help execute a seamless
transaction and ensure pension promises are kept to employees and
retirees.
Under New Tax Law, Finance Leaders
Show Appetite for Pension De-Risking
CFO Research, in collaboration with Prudential,
surveyed senior finance executives and discovered how the Tax
Cuts and Jobs Act of 2017 is driving senior finance executives to
reduce the liability risks associated with their corporate defined
benefit (DB) pension plans. Click Here to read more
Preparing for Pension Risk
Transfer
Whether or not a buy-out is imminent, there are
preparations a plan sponsor can take to make a future transaction
easier and to shorten the timeline for execution. Click Here to read more
Data Spotlight: CFO Research
Survey Results
A new study of 127 senior finance executives
revealed that many are using the Tax Cuts and Jobs Act to ramp up
their funding contributions. The study also found that:
· 74% were very likely to make a substantial DB plan
contribution
· by September 15
· 24% plan to use repatriated capital to bolster their DB
funding levels
· 29% expect to use excess income to minimize liability
risk, through such efforts as boosting retiree healthcare funding
· 62% agree, once their DB pension plan becomes
well-funded, they’re very likely to execute a full or partial
pension risk transfer
Click Here to read full results
Working With a Pension Leader
Whether you’re a plan sponsor, adviser or
consultant, working with the right partner through a pension risk
transfer is critical to transaction success. What is unique to
working with Prudential is the quality of our people. Click Here to read more
DOL
Pressure on Missing Participants Propels New Solution Plan Sponsor | John Manganaro
“As a plan sponsor, if you have an
opportunity to deal with lost participants and do something with
un-cashed checks, why wouldn’t you do that?” asks Mark Koeppen at
FPS Trust.
According to Mark Koeppen, senior vice president in
charge of strategic rollovers for FPS Trust, disproportionate
cost-shifting to accounts with higher balances and increased
liability are just some of the issues fiduciaries face when
employees move on to other opportunities and leave their
qualified retirement plan balances behind.
“It is a big challenge for the plan sponsor
community, deciding how to deal with growing plan fees from
employees who go off to other jobs, leaving the employer to deal
with the cost and paperwork of the retirement account they leave
behind,” Koeppen says.
Sensing an opportunity to better serve plan sponsors
facing this challenge, FPS Trust has designed a fully automated
rollover program that will establish individual retirement
accounts (IRAs) for former, non-responsive employees with qualifying
balances below $5,000. The solution is also tailored for
terminating plans with non-responsive participants.
“We have been focusing a lot on the auto-IRA
rollover market in recent years, given how much of a challenge it
is for the industry,” Koeppen tells PLANSPONSOR. “We have been
working with plan sponsors, consultants and advisers to try to
find solutions to retirement plan leakage. We have learned there are some key points where
these stakeholders can come together and create powerful
solutions to help protect the assets of retirement plans and
participants.” Click Here for full article.