How to Walk the Line With Pension Overpayments
By Mary Shah and Mindy Zatto, Strategic Benefit
Advisors | 6/18/19 | PLANSPONSOR
Mary Shah and Mindy Zatto, from Strategic Benefits
Advisors, discuss ways to recoup pension overpayments that
satisfy regulators and do not place burden on retirees, as well
as how to prevent overpayments from happening.
Every few years, it seems, a new
pension overpayment story makes the papers. Last
summer, we saw AT&T on the front page of the Wall Street
Journal, its attempts to recoup funds from retirees, with the
help of a collection agency, unflatteringly reported under the
headline “AT&T Overpaid Some Pensioners; Now It Wants the
Money Back.”
Plan sponsors nearly always find themselves in a
difficult position when pensioners have been paid more than the
plan’s provisions stipulate. Recovering overpayments is easier
said than done, and the ill will generated from doing so can run
counter to a company’s other objectives. Yet, the IRS mandates
that, in the case of an overpayment, the plan should be made
whole so it is preserved for all pensioners who rely on its
funds.
Lump-sum or installment repayment
Requiring repayment in a lump sum is fairly
straightforward for the plan sponsor, but it can have the effect
of substantially—or entirely—draining affected retirees’ savings.
Spreading repayments over a fixed schedule of installments can
lessen the blow. However, if the participant passes away before
overpayments are fully recouped, the plan sponsor generally must
make a lump-sum contribution to the plan to complete the
repayment.
Actuarially equivalent permanent reduction
Another approach is to recoup the value of pension
overpayments over the remainder of each participant’s lifetime.
This option satisfies the IRS, which deems plans to be repaid as
soon as the actuarially equivalent permanent reduction is
established. It’s also more attractive to participants than
lump-sum repayment, and it’s a smart choice for plan sponsors,
which are not required to make additional payments in the event a
participant passes away before the plan is made whole.
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Lower Interest Rates Continue to Plague DB Plan
Funded Status
By Rebecca Moore | 8/9/19 | PLANSPONSOR
“Plan sponsors should review their risk management
toolkit to consider whether their investment policy is aligned
with the current market environment and to explore potential risk
transfer activity,” suggests Scott Jarboe, with Mercer.
Defined benefit (DB) plan funding ratios decreased
throughout the month of July, primarily driven by tightening
credit spreads, resulting in a decrease in the discount rate,
according to Legal & General Investment Management America
(LGIMA). It estimates that the average plan’s funding ratio fell
0.8% to 82.3% through July.
LGIMA’s Pension Solutions’ Monitor report notes
that, “The rates market once again took its cues from the central
bank. Echoing sentiments other members had voiced in June
speeches, Fed Chair Powell’s comments before Congress at the
Humphrey Hawkins meeting emphasized concerns over trade issues,
slowing global growth, and inflation trending below target. This
testimony, coupled with the release of the June FOMC minutes, set
the groundwork for the first Fed cut since the financial crisis.
At the July 31 meeting, the Fed cut interest rates by 25 basis
points and ended their balance sheet runoff two months earlier
than planned.”
LGIMA estimates the discount rate’s Treasury
component increased by 1 basis point while the credit component
tightened 7 basis points, resulting in a net decrease of 6 basis
points. The negative impact due to the change in Treasury rates
is a function of positive carry of the liabilities. Overall,
liabilities for the average plan increased 1.21%, while plan
assets with a traditional “60/40” asset allocation increased by
approximately 0.28%.
Due to lower interest rates, liability values
increased, and were only partially offset by muted asset
performance, according to Ned McGuire, managing director and a
member of the Investment Management & Research Group of
Wilshire Consulting. According to the firm, the aggregate funded
ratio for U.S. corporate pension plans decreased by 0.4
percentage points to end the month of July at 85.6%. It says
liability values increased 0.7% for the month, while asset values
increased 0.3%.
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