Proposed Mortality Assumptions Will Increase DB Plan
Costs By PLANSPONSOR Staff | April
26, 2017
The Society of Actuaries estimates an increase in
funding target liabilities, PBGC premiums and minimum required
contributions.
The Society of Actuaries has analyzed the Internal
Revenue Service’s proposed increases to the mortality tables that
would apply to single employer pension plans in 2018, and has
found that they will increase Pension Benefit Guaranteed
Corporation (PBGC) premiums by 12%, from $8.6 billion to $9.6
billion.
They would also result in a 2.9% increase in the
aggregate funding target liabilities, raising them by $65
billion, and decrease the aggregate funded status, from 97% to
96%. The aggregate funded percent would fall by a smaller
percentage than the funding target would rise because many plans
have enough surplus to cover the increase in their funding
target, although their surplus would shrink. Plans that have a
deficit on the current mortality basis would see an increased
deficit, and it could be significant. And some plans with a small
surplus would find themselves with a funding deficit. The authors
estimate that the aggregate unfunded funding target (deficit)
would increase 35%, from $63 billion to $85 billion, and the
aggregate surplus would fall 14%, from $314 billion to $271
billion.
This study presents estimates of aggregate
liabilities for minimum funding purposes (funding target) and
funded status based on the following key assumptions:
- Actual contributions continue to follow recent
patterns relative to plan funding levels as determined for
both funding regulations and PBGC premiums;
- Treasury High Quality Market (HQM) corporate
bond yield curve spot interest rates remain constant after
2016; and
- Asset returns after 2016 equal 6% annually.
Based on analysis of solely traditional pension
plans, one might expect a slightly higher increase of 3% to 5% of
aggregate funding target liabilities, depending on the discount
rate and age and gender mix of a plan population. However, the
mortality change does not affect cash balance liabilities to the
same extent as traditional pension plans.
While cash balance liabilities make up a meaningful
portion of the aggregate funding target, the precise portion is
difficult to determine.
Form 5500 and its Schedules do not provide for
reporting the portion of liabilities that stems from cash balance
benefit designs. In addition, some plans have both traditional
and cash balance or other hybrid designs. After analysis and
consultation with actuaries working with large single employer
pension plans, the authors estimate that roughly 10% of the
aggregate funding target stems from cash balance designs. Click
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How to Repair Common Plan Errors Rebecca
Moore EDITORS(at)AssetInternational.com | June 09, 2017
What programs are available to help when a plan
error gets committed?
No one is perfect, not even plan sponsors. Mistakes
will be made.
Speaking at the 2017 PLANSPONSOR National
Conference, in Washington, D.C., Tami Guimelli, assistant vice
president, Employee Retirement Income Security Act (ERISA)
attorney, benefits consulting group at John Hancock Retirement
Plan Services, discussed common plan mistakes and how to navigate
the regulators’ various correction programs.
Guimelli explained that the self-correction program
(SCP) is part of the Internal Revenue Service (IRS)’ Employee
Plans Compliance Resolution System (EPCRS) and allows plan sponsors
to correct operational plan failures. The voluntary correction
program (VCP) covers operational failures, but also demographic
failures and plan document failures.
There is a fee involved with the VCP. Plan sponsors
file a formal submission process and pay a per-participant fee.
Guimelli said the IRS will review the plan sponsor’s proposed
correction and, hopefully, approve it and send the sponsor a
compliance letter. The sponsor will have 150 days to fix the
error.
The closing agreement program (CAP) is the most
expensive IRS correction program, but sometimes the fee can be
negotiated down. An error that would require the CAP could be one
the IRS finds during an examination of the plan; it would
disqualify the plan and make it and participant contributions
subject to taxation.
Guimelli noted it is easier to fix a problem before
the IRS finds it. Click Here to
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SCOTUS Endorses Broader Understanding of ‘Church
Plans’ Rebecca Moore
EDITORS(at)AssetInternational.com | June 05, 2017
The Supreme Court has ruled plans maintained by principal-purpose
religious organizations are eligible for the church-plan
exemption, whatever their origins.
Following oral arguments in March in the cases
of Advocate Health Care Network v. Stapleton, St.
Peter’s Healthcare System v. Kaplan, and Dignity
Health v. Rollins, the U.S. Supreme Court found plans
maintained by principal-purpose organizations qualified as
“church plans." However, the court did not rule that
the health care systems in these cases qualified as
principal-purpose organizations.
Of the many cases challenging whether an entity’s
pension plan is a “church plan” under the Employee Retirement
Security Act (ERISA), federal appellate courts ruled that the
plans in these cases did not fit ERISA’s definition of “church
plan.”
In its slip opinion, the Supreme Court focuses on
the definition of church plan under ERISA, noting that from the
beginning, ERISA has defined a “church plan” as “a plan
established and maintained ... for its employees ... by a
church.” Congress then amended the statute to expand that
definition, adding the provision that: “A plan established and
maintained for its employees ... by a church ... includes a plan
maintained by an organization ... the principal purpose ... of
which is the administration or funding of [such] plan ... for the
employees of a church ..., if such organization is controlled by
or associated with a church.”
The Supreme Court concluded that a plan maintained
by a principal-purpose organization qualifies as a “church plan,”
regardless of who established it. It noted that the amendment
provides that the original definitional phrase will now “include”
another—“a plan maintained by [a principal-purpose]
organization.”
“That use of the word ‘include’ is not literal, but
tells readers that a different type of plan should receive the
same treatment (i.e., an exemption from ERISA) as the type
described in the old definition," the justices said. Click Here to
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Fixed Income Strategies in a High Interest Environment Javier
Simon EDITORS(at)AssetInternational.com | May 22, 2017
In light of market
rate hikes, PIMCO offers investing insight to prepare.
In light of looming interest rate hikes, PIMCO
suggests the current environment could make active fixed income
strategies more lucrative.
Even though several plan sponsors are moving away
from active management to avoid high fees particularly with
stocks, the firm notes that bonds are different. PIMCO points to
research by Morningstar indicating 84% of active managers in
three of the most common DC bond categories beat their median
passive peers over the last five years, whereas only 41% of
active equity managers outperformed their median passive peers.
But in light of market volatility, PIMCO also
advises investors to rethink how they invest in bonds. The firm
suggests employing diversified bond allocations “representative
of the broadest global bond opportunity set.” It also directs
sponsors to “increase tactical duration flexibility to mitigate
downside risk,” and “allocating dynamically across credit markets
to capture a premium above government bonds.”
PIMCO notes this can be achieved by turning a focus
on multi-sector bonds, and consolidating bond options into a
single, multi-sector solution pre-packaged or in white label
form. Click Here to
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