Pension Changes from COVID Relief: Multi-Employer Plans

Estimated reading time: 4 minutes

The fifth round of COVID relief, the American Rescue Plan Act of 2021 (ARPA) was signed by President Biden on March 11, 2021. There are several changes in the details of the law that affect pension plan sponsors. This article focuses on changes to multi-employer plans. If you are a sponsor of or participate in a single employer plan, please check out our update on those changes here: Pension Changes from COVID Relief: Single Employer Plans.

Like the changes to the single employer system, the changes to the multi-employer system also contained modifications to reduce the amount of the annual required contribution, however, the primary purpose of the law was to provide governmental financial assistance to significantly underfunded plans.  

Reform concept. Stacked Wooden letters on the office desk.  Multi-Employer Plans Impact from the American Rescue Plan Act of 2021 (ARPA).

Special Financial Assistance

Troubled multi-employer plans will be eligible to receive funding from the PBGC necessary to keep the plan solvent until at least 2051, with no reduction in participant benefits. Eligible plans include:

  1. plans in critical and declining status for any plan year beginning in 2020 through 2022
  2. plans that have approved benefit suspensions
  3. plans in critical status with a modified funded percentage of less than 40%, and a ratio of active to inactive participants which is less than two to three
  4. plans that became insolvent after December 16, 2014, and have remained insolvent and not been terminated

Any plan receiving special financial assistance would be deemed to be in critical status until the last day of the plan year ending 2051. The funds received would be segregated from other plan assets and only invested in investment grade bonds or other investments permitted by the PBGC. Any benefit reductions from a previously approved benefit suspension would have to be reinstated prospectively for participants and beneficiaries and no future suspensions would be permitted. 

Multi-employer plans have until December 31, 2025, to apply to the PBGC for special funding assistance. Once submitted, the PBGC will have 120 days to reject the application. If the application is not rejected within 120 days, it is deemed to be approved.  If the original submission is rejected, funds would have until December 31, 2026 to submit a revised application.

One of the primary differences between the new law and the original Butch Lewis Act is that in the original bill the PBGC financial support was in the form of a loan that was to be paid back over 30 years. The new law does not contain this requirement.

The PBGC is required to provide regulatory guidance within 120 days of the enactment of the Law.

Delayed Status Recognition and Extended Recovery Periods

The new law allows plans to delay the recognition of any funding status changes (Endangered, Critical, or Critical and Declining) until the first plan year beginning on or after March 1, 2021 (or the next succeeding plan year) and permits plans with funding improvement or rehabilitation plans not to update their funding improvement or rehabilitation plans and schedules for this designated plan year. In addition, for plans in endangered or critical status for a plan year beginning in 2020 or 2021, the new law allows them to extend their rehabilitation period by five years. These changes allow funds additional time to recover from the economic impact of COVID both on the economy and the financial markets.

Extended Amortization Bases for 2020 Market Losses

Similar to legislation passed after market declines in 2008 and 2009, plans would be permitted to amortize the impact of investment losses for the first two plan years ending after February 29, 2020 over a 30 year period. This is an extension of the current requirement to amortize gains and losses over a 15 year period.

Increase in PBGC Premiums

The new law will increase the PBGC premiums paid by multi-employer plans from the current $31 per participant to $52 per participant but this doesn’t kick in until 2031. Future increases will be indexed for inflation.

Analysis

The new law will provide a lifeline to many multi-employer funds that have been most impacted by the economic changes over the past 15 years. Without this much-needed relief, hundreds of thousands of retirees were facing significant reductions in their retirement benefits. Also, the additional time granted to allow Rehabilitation and Funding Improvement Plans and the ability to recognize 2020 investment losses over a longer period will lower the impact of the current economic conditions for many plans.

If you have any questions regarding how the ARPA might have impacts on your multi-employer pension plan, we encourage you to contact the Findley consultant you normally work with, or contact us in the form below to start the conversation on how this can impact your multi-employer plan.

Published March 11, 2021

Print the article

Copyright © 2021 by Findley, A Division of USI. All rights reserved.

Pension Changes from COVID Relief: Single Employer Plans

Estimated reading time: 4 minutes

The fifth round of COVID relief, the American Rescue Plan Act of 2021 (ARPA) was signed by President Biden on March 11, 2021.  There are several changes in the details of the law that affect pension plan sponsors. This article focuses on changes to Single Employer plans. If you are a sponsor of or participate in a multi-employer plan, please check out our update on those changes here: Pension Changes from COVID Relief: Multi-Employer Plans.

While changes to the multi-employer system were designed to provide funding to significantly underfunded plans, the single-employer changes were designed to reduce the funding requirements for plans for the rest of the decade.

Extended Amortization Period

Since the Pension Protection Act (PPA) went into effect in 2008, the actuary calculates the change in the funded status of the plan every year.  A new base is set up each year to amortize unexpected changes in the funded status over seven years. As a result, most single employer plans currently have seven amortization bases. The new law wipes away all the old bases and resets all underfunding in one new base.  This base, and all future bases, will be amortized over 15 years instead of seven. This would be similar to refinancing a loan over a new longer period in order to reduce the required payment.

Extension of Interest Rate Stabilization

As interest rates continue to hover near historical lows, pension plan sponsors feel the pinch. Since pension liabilities are discounted using bond yields, low yields make for higher liabilities. The original Pension Protection Act (PPA) law was set to use a 24-month average of corporate bond rates. Later, an upper and lower boundary was created based on a 25-year average of corporate bond rates for the purpose of determining the minimum required contribution. The boundaries were set to start expanding in 2021 and effectively would have been fully phased out by 2024. Because current interest rates are lower than historical rates, this would lead to higher required contributions at a time when businesses can least afford them. Hence, the need for a law change.

Under the new law, the corridor’s range is being narrowed and won’t start widening until 2026. This will keep rates more level and mitigate the impact of the currently low interest rates for years. Finally, in an attempt to avoid having to re-visit these rules again if interest rates remain at historical lows, a 5% floor has also been added. Meaning, the interest rate used to determine the required contribution won’t drop below 5.0% regardless of market conditions. The chart below will help you understand how much the new law moves the needle.

Chart - Impacts of ARPA on Single Employer Plans - Interest Rates to be Used for Minimum Funding Purposes

Other Items

It is important to note that the extended amortization period can be retroactive to plan years beginning in 2019 and the extension of interest rate stabilization can be retroactive to plan years beginning in 2020. Even though many valuations have already been completed it may be advantageous to revise those reports in order to take advantage of the new law. 

There also is the ability to not have the new law apply until 2022. An election form will be needed for most single employer pension plan sponsors regardless as sponsors can specify not only when the new law applies but also for which purposes. There is also an extension of special funding rules that apply only to community-based newspapers.

Analysis

It is important to note what is not included in the relief package: reductions to PBGC premiums. Contrary to the PBGC Multiemployer Trust which was projected to go bankrupt in 2026, the Single Employer Trust is overfunded and projected to increase overfunding each year moving forward. However, even with this projected overfunding neither of the changes outlined above alter the skyrocketed premium increases that occurred during the last decade.
It is important for plan sponsors to keep in mind that making lower contributions will likely increase their PBGC premiums and the management of those premiums will be a significant driver of funding decisions in the future. Even with lower contribution requirements, it may be prudent to make higher contributions in order to improve the plan’s funded status and lower PBGC premiums.

If you have any questions regarding how the ARPA might be impacting your single-employer pension plan, we encourage you to contact the Findley consultant you normally work with, or contact us in the form below to start the conversation on how this can impact your single employer plan.

Published March 11, 2021

Print the article

Copyright © 2021 by Findley, A Division of USI. All rights reserved.

Developing a Strategy for Moving from Pension to 401(k) Benefits

Budgeting for next year’s cost of employer-provided benefits can seem daunting, especially when an organization sponsors both a defined benefit pension plan and a 401(k) defined contribution plan. Is it time to consider moving away from the defined benefit pension plan to avoid the volatility and risk? If so, plan sponsors should develop a well-thought-out process for analyzing the alternatives and impact to both employer costs and participant benefits. The overall strategy and objectives should be reviewed.

Each year, an actuary provides projections for the defined benefit pension plan and the amount required to fund seems to be ever-increasing. It feels like there’s no end in sight. Becoming fully funded seems to be a dream instead of a reality. Even in years when the assets in the plan had double-digit returns, there was either a new mortality table that needed to be adopted or the required interest rates dropped – all increasing the plan’s liability. This can be very difficult to manage going forward.

Strategy for Moving from Pension to 401(k) Benefits

While it is challenging to deliver an equivalent benefit in a defined contribution plan at the same level of contribution, defined contribution plans provide a predictable level of employer contribution each year. If plan sponsors are considering a transition to a replacement 401(k) plan, an analysis should be conducted to:

  • Determine the level of benefit desired for employees
  • Set a budget that provides the desired level of benefit when considering a defined benefit pension plan freeze

Performing the Analysis

When performing this type of analysis, we encourage companies to start by thinking of both the defined benefit pension and defined contribution plans together as a total retirement benefit. This allows the plan sponsor to contemplate its philosophy and develop a strategy related to short- and long-term goals for the retirement program.

Pension to 401(k) Benefits Flowchart

Establish Guidelines

Plan sponsors should start with a well-defined and proven process, taking the time to establish guidelines and understand the financial strategy. Begin by discussing the organization’s philosophy and define objectives for the retirement program to guide decision-making. These guidelines should include how the plan sponsor feels about management/budgeting of retirement plan costs, willingness to take on risk, providing benefits based on the organization’s ability to fund – discretionary vs. mandatory, the level of employees’ retirement benefits, and the competitiveness of benefits.

Determine Affordability

By evaluating all the current retirement plans and the projected cost and benefits, organizations will better understand the current and projected state of the plans and be able to determine the affordability of current plans over the long-term. The evaluation also allows them to discuss acceptable benefit levels and a cost strategy. A thorough analysis of the current and projected costs should include an outline of the current state of the program, including five-year projections under three scenarios for the defined benefit pension plan:

  • Ongoing plan
  • Closed to new entrants
  • Frozen accruals

In addition, the termination liability estimate under agreed upon assumptions should be calculated.

Determine Competitive Position

The guidelines and budgets are then coordinated with competitive market benchmarking to identify relevant alternatives to evaluate. Benchmarking the retirement plan benefits with competitive norms relative to the market allows the organization to measure the competitive position of benefits and expenses compared to industry/geographic region/employer size based on revenue or number of employees. The benchmarking helps the plan sponsor make informed decisions on the:

  • Form of benefit to be provided
  • Desired level of benefit for new hires/newly eligible participants
  • Impact on total compensation and the benefits package
  • Desired contribution allocation structure – pro-rata on pay, position-based, or based on age and/or length of service

Evaluate Alternate Strategies

Potential plan design alternatives including utilizing the current defined contribution plan should be developed based on previous discussions related to the organization’s philosophy, objectives and strategic direction for the retirement program. Alternative strategies can be assessed to determine the final strategic direction of the retirement program, such as modifying the current level of pension benefits or reduction/elimination of the defined benefit pension plan by freezing pension benefit accruals for all participants and moving toward a defined contribution plan only strategy.

Other strategies such as grandfathering selected participants or providing participants a “choice” between defined benefit and enhanced defined contribution benefits should be considered. If providing enhanced defined contribution benefits, determination of how the benefit will be provided – either with matching contributions and/or non-elective contributions in a fixed amount, performance-based, or based on a tiered age and/or service allocation – should be evaluated as well.

Modeling different plan designs that include variations of both defined benefit pension and defined contribution structures helps the plan sponsor compare costs and benefits. Based on the guidelines set upfront, these plan designs reflect the organization’s philosophical principles for providing these benefits to employees. The results of this analysis and each alternative are compared to the current plan(s) to show the overall impact on the employer-provided cost and level of employee benefit. Be prepared to study supplemental alternatives at this point because the first set may provoke additional thoughts or refinements.

Plan sponsors must be aware of compliance testing restrictions and be sure that any alternative considered will satisfy compliance rules — there is no point in studying an alternative that cannot be adopted due to nondiscrimination or coverage issues.

Making and Implementing the Decision

When all alternatives are reviewed, a final recommendation that ultimately links the retirement strategy with the philosophy and desired objectives is presented. Any potential transition issues or challenges should be outlined and a communication strategy should be developed. Establishing a formal communication plan is very important.

Develop and Document the Retirement Plan Strategy and Implementation Plan

The end result of the review should include a proposed retirement plan strategy to be presented to the board of directors. The proposed strategy should document the findings and conclusions of the review process and identify the steps necessary to carry out the recommendations within the strategy.

Change Management: Communicating to Employees

After the decision is made to change retirement benefits, communication to those impacted is key. This is the perfect time to remind employees of the retirement program and its overall value. In addition to government-required notices, you should also consider proactively sending out an individualized statement outlining the changes and providing the impact on participant’s benefits. It is important to make sure the changes are communicated clearly and that each participant understands the changes. Sometimes plan sponsors will hold group or one-on-one meetings with those impacted.

In Perspective

A change in the retirement program is a significant decision that affects the organization and its employees significantly. A thoughtful approach to a change like this can lead to better alignment of the overall program with organizational philosophy and goals, while still providing employees with competitive benefits.

If you have any questions regarding your options with transitioning from pension to 401(k) benefits, please contact Amy Kennedy at amy.kennedy@findley.com or Kathy Soper at kathy.soper@findley.com.

Published May 14, 2020

Print this article

Copyright © 2020 by Findley, Inc. All rights reserved

Retiree Pension Risk Transfers in THIS Low Interest Rate Environment?

Although interest rates are at all-time historic lows, it doesn’t mean that a retiree pension risk transfer is a bad idea for your defined benefit pension plan. Below is a brief discussion on the pros and cons of considering a pension risk transfer for retirees at this time.

reasons to complete a pension risk transfer

Reasons to Complete a Pension Risk Transfer

PBGC Premium Savings: If your company’s pension plan is at the PBGC variable premium cap, the PBGC savings will be in excess of $644 per retiree in 2021. In a low interest rate environment, it is likely your plan is at or close to the variable premium cap. Focusing on retirees with small benefits will help manage the cost of the pension risk transfer while maximizing savings. For more on current and historical rate information, click to see PBGC Premium Rates.

Economic Savings: Plan sponsors tend to focus on the cost of the annuity premium versus the accounting liability. However, the accounting liability ignores on-going expenses related to running the plan. These expenses include PBGC premiums, administrative costs and investment costs. The “economic cost” of the plan’s liability is the accounting liability plus these additional costs. The annuity premium when compared to the economic cost typically results in overall savings for the plan sponsor even in a low interest rate environment. This is especially true when the plan is at the PBGC premium variable cap.

Competitive Market: There are currently about 10 to 15 insurers actively buying retiree liabilities from pension plans. Based on the size of a particular annuity premium, a plan sponsor can expect to receive quotes from about half of the insurers in the market. Insurance companies can be competitive with their retiree annuity premiums because they have a lot of experience predicting mortality for retirees. In addition, retiree annuities offer a good offset to life insurance risk.

Capacity: Insurance companies currently have capacity to buy retiree annuities. If interest rates rise significantly and many more pension plans start looking to sell annuities, will the insurance companies have capacity to take on a flood of new pension risk transfers? Additionally, with the basic laws of supply and demand, if there is a large supply of plan sponsors wanting to do pension risk transfers, will the annuity premium be as attractive when compared to the economic cost of the retiree liability? We believe a spike in current low interest rates could reduce capacity and pricing competitiveness.

US single premium buyout sales in low interest environment for pension risk transfer

Reasons Against Pension Risk Transfer (But Consider it Anyway)

Higher Minimum Required Contributions: A retiree pension risk transfer is likely to increase the minimum required contribution of a plan due to differences in assumptions used to determine minimum required contributions. Because minimum funding requirements are allowed to use more aggressive assumptions, the difference between the insurance premium paid and the liabilities released creates a loss to the plan. This loss is amortized and paid over the next seven plan years. However, the increased contributions are typically viewed as an acceleration of future contributions. As the minimum required interest rates drop, future contributions will increase if the retirees remain in the plan.

Settlement Accounting: A full retiree pension risk transfer is likely to trigger settlement accounting for a pension plan. This settlement accounting typically results in a one-time charge to the income statement. Depending on the sensitivity of one-time charges for a particular company, this could be an obstacle. However, a settlement is a “below-the-line” cost under ASU 2017-7. This makes settlements less of an issue for many companies. Additionally, even if settlements are an obstacle for your company, performing multiple smaller pension risk transfers with smaller premiums over a number of fiscal years can be a way to avoid settlement costs.

Plan Not 80% Funded: Annuities cannot be purchased for a plan that is not 80% funded on a PPA interest rate relief basis unless the plan sponsor makes some immediate funding to the plan. However, the 80% funded status threshold is determined based on a smoothed interest basis. As a result, the funded status of many plans is more than 80% even in this low interest rate environment.

Interest Rates Will Rise: For years, there has been talk that interest rates must go up. However, they continue to remain low. In a low interest rate environment, it makes sense to monitor interest rates. Plan sponsors should consider being ready to buy annuities by getting their data ready and setting a targeted annuity premium. They can then monitor the impact of changing interest rates. Once the target is met, they will be ready to move quickly with the pension risk transfer.

Pension Risk Transfer Takeaways

With the current market volatility and extreme swings in interest rates, we don’t expect many plan sponsors to move forward with a pension risk transfer for retirees in the near-term. However, if markets stabilize and interest rates begin to rise consistently, insurance companies will likely be eager to close some deals. This could result in attractive pricing.

It’s never too early to start planning for a pension risk transfer. As a first step, we suggest performing a financial analysis to determine the impact of a pension risk transfer for retirees. With this financial information, most plan sponsors can be positioned to move quickly and recognize the right time to buy annuities for retirees even in a low interest rate environment.

To learn more, contact Larry Scherer at 216.875.1920 or Larry.Scherer@findley.com

Published March 25, 2020

Print this article

© 2020 Findley. All Rights Reserved.

2020 Defined Benefit Plan Compliance Calendar

Calendar Plan Year & Calendar Employer Tax Year*

defined benefits plan compliance calendar 2020 January through June
defined benefits plan compliance calendar 2020 July through December

January 2020  

15   Due date to make fourth required quarterly contribution for 2019 plan year

31   Last day to file Form 945 to report withheld federal income tax from distributions

31   Last day to furnish Form 1099-R to recipients of distributions during 2019 calendar year

February 2020

28   Last day to file Form 1096 and Form 1099-R on paper with the IRS

March 2020

31   Last day to file Form 1099-R electronically with the IRS

31   Deadline for enrolled actuary to issue AFTAP certification for current year to avoid presumption for benefit restrictions (if applicable)

April 2020

01   Presumed AFTAP takes effect unless and until enrolled actuary issues certification of AFTAP for current plan year (if applicable).

01   Last day to pay initial required minimum distributions to applicable plan participants

15   Due date to make first required quarterly contribution for 2020 plan year

15   Last day to file financial and actuarial information under ERISA section 4010 with PBGC (if applicable)

15   Last day for C corporation employer plan sponsors to make contributions and take tax deduction for 2019 without corporate tax return extension

15   Last day to furnish Annual Funding Notice (for plans covered by PBGC that have more than 100 participants)

May 2020

01   Last day to provide notice of benefit restrictions, if restrictions are applicable as of April 1, 2020

July 2020

31   Due date to make second required quarterly contribution for 2020 plan year

31   Last day to furnish Summary of Material Modifications (SMM) to participants and beneficiaries receiving benefits

31   Last day to file Form 5500 for 2019 without extension.

31   Last day to file Form 8955-SSA without extension

31   Last day to provide a notice to terminated vested participants describing deferred vested retirement benefits (in conjunction with Form 8955-SSA)

31   (or the day Form 5500 is filed, if earlier) – Last day to furnish Annual Funding Notice (for PBGC covered plans with 100 or fewer participants without extension)

31   Last day (unextended deadline) to file Form 5330 and pay excise tax on nondeductible contributions and prohibited transactions (if applicable)

September 2020

15   Last day to pay balance of remaining required contributions for 2019 plan year to satisfy minimum funding requirements.

30   Last day to furnish Summary Annual Report to participants and beneficiaries (for non-PBGC covered plans)

30   Last day for enrolled actuary to issue AFTAP certification for current plan year

October 2020

01   If enrolled actuary does not issue AFTAP certification for plan year, then AFTAP for the plan year is presumed to be less than 60 percent and plan will be subject to applicable benefit restrictions.

15   Last day to file Form 5500 (with extension)

15   Last date to file Form 8955-SSA (with extension)

15   Last day to provide a notice to terminated vested participants describing deferred vested retirement benefits (in conjunction with Form 8955-SSA)

15   Due date to make third required quarterly contribution for 2020 plan year

15   Last day to file PBGC comprehensive PBGC premium filing and pay premiums due (for plans covered by PBGC)

31   Last day to provide notice of benefit restrictions, if restrictions are applicable as of October 1, 2020

December 2020

15   Last day (with extension) to furnish Summary Annual Report (for non-PBGC covered plans)

31   Last day for enrolled actuary to issue a certification of the specific AFTAP for current year if a range certification was previously issued

31   Last day for plan sponsors to adopt discretionary plan amendments that would be effective for the current plan year

*This calendar is designed to provide a general overview of certain key compliance dates and is not meant to indicate all possible compliance dates that may affect your plan.

© 2020 Findley • All rights reserved

If you would like more specific information about each compliance item, you may review or print the calendar below.

Print 2020 Detailed Benefit Plan Compliance Calendar

Interested in other compliance calendars?

Defined Contribution

Health & Welfare

Impact of Historic Interest Rate Decline on Defined Benefit Plans

How will defined benefit pension plans be impacted by historic year-to-year interest rate declines? The U.S. has experienced over a 100 basis point decrease on 30-year treasury rates and significant decreases across treasury bonds of all durations from year-to-year. After a slight uptick in rates during the fourth quarter of 2019, interest rates have plummeted in the first quarter of 2020. The low interest rate environment, coupled with recent volatility in the market arising from concerns over the Coronavirus, has pension plan sponsors, CFOs, and actuaries alike, taking an in-depth look at the financial impact.

Historic Interest Rate Decline on Defined Benefit Plans and options to consider.

How Will Your Company be Impacted by Historic Interest Rate Decline?

Under U.S. GAAP and International Accounting Standards, pension liabilities are typically valued using a yield curve of corporate bond rates (which have a high correlation to Treasury bond rates) to discount projected benefit payments. Current analysis shows that the average discount rate has decreased approximately 100 basis points from the prior year using this methodology.

Due to the long-term benefit structure of pension plans, their liabilities produce higher duration values than other debt-like commitments, that are particularly sensitive to movement in long-term interest rates. The general rule of thumb is for each 1% decrease in interest rates, the liability increases by a percentage equal to the duration (and vice versa). The chart below, produced using Findley’s Liability Index, shows the percentage increase in liabilities for plan’s with varying duration values since the beginning of 2019.

Pension Liability Index Results - 2/29/2020

Assuming all other plan assumptions are realized, the larger liability value caused by the decrease in discount rates will drive up the pension expense and cause a significant increase in the company’s other comprehensive income, reflecting negatively on the company’s financial statements.

Considerable Growth in Lump Sum Payment Value and PBGC Liabilities

Additional consequences of low treasury bond rates include growth in the value of lump sum payments and PBGC liabilities. Minimum lump sum amounts must be computed using interest rates prescribed by the IRS in IRC 417(e)(3) which are based on current corporate bond yields. PBGC liabilities are also determined using these rates (standard method) or a 24-month average of those rates (alternative method). For calendar year plans, lump sums paid out during 2020 will likely be 10-20% higher for participants in the 60-65 age group, than those paid out in 2019. For younger participants, the increase will be even more prominent.

In addition, if the plan is using the standard method to determine their PBGC liability, there will be a corresponding increase in the liability used to compute the plan’s PBGC premium. In 2020, there will be a 4.5% fee for each dollar the plan is underfunded on a PBGC basis. Depending on the size and funding level of the plan, the spike in PBGC liability may correspond to a significant increase in the PBGC premium amount.

What If We Want to Terminate our Pension Plan in the Near Future?

For companies that are contemplating defined benefit pension plan termination, there will be a significant increase in the cost of annuity purchases from this time last year. The actual cost difference depends on plan-specific information; however, an increase of 15-25% from this time last year would not be out of line with the current market. This can be particularly problematic for companies who have already started the plan termination process. Due to the current regulatory structure of defined benefit pension plan terminations, companies must begin the process months before the annuity contract is purchased. The decision to terminate is based on estimated annuity prices which could be significantly different than those in effect at the time of purchase.

Actions You Can Take to Mitigate the Financial Impact

Contributions to the plan in excess of the mandatory required amount will help offset rising PBGC premiums since the premium is based on the underfunded amount, not the total liability. Additional contributions would also help offset the increase in pension expense.

The best advice we can offer at this time is to discuss these implications internally and with your service providers. Begin a dialogue with your investment advisors about the potential need to re-evaluate the current strategy due to market conditions. Contact your plan’s actuary to get estimated financial impacts so you can plan and budget accordingly. If your plan has recently begun the plan termination process, you may need to reconvene with decision-makers to make sure this strategy is still economically viable.

Questions? For more information, you can utilize Findley’s Pension Indicator to track the funded status of a variety of plan types each month. To learn more about how this historic interest rate decline may impact your plan specifically contact your Findley consultant, or Adam Russo at adam.russo@findley.com or 724.933.0639.

Published on March 3, 2020

© 2020 Findley. All Rights Reserved.

Print the article

Pension Strategy Driver – 2020 PBGC Premium Rates Announced

For many sponsors of single-employer pension plans, the minimum cash funding requirement is no longer the most important number discussed with their actuaries every year. Instead, pension plan sponsors have shifted their focus to managing their PBGC premiums.

PBGC Premium Rates Chart 2007-2020. Flat-Rate vs. Variable-Rate

PBGC Premiums Defined

The PBGC premium is essentially a tax paid to a government agency to cover required insurance for the plan and the participant benefits in the event that the plan sponsor goes bankrupt. The annual premium is calculated in two parts – the flat-rate premium and the variable-rate premium – and is subject to a premium cap.

The flat-rate premium is calculated as a rate per person.

The PBGC variable-rate premium is an amount that each plan sponsor pays based on the underfunded status of its plan.

The variable-rate premium cap is a maximum amount that a plan sponsor of a significantly underfunded plan has to pay. It is calculated based on the number of participants in the plan. There are other caps that apply for small plans.

2020 Premiums Announced

For 2020, the flat-rate premium amount is $83 per person. This is 168% higher than the rate of $31 per person at the beginning of this decade.

For 2020, the variable-rate premium has jumped to $45 per $1,000 of the underfunded amount. Up until 2013, that rate was $9 per $1,000. That amounts to a 400% increase in just seven years.

The cap for 2020 is $561 per person; which means for a 10,000-life plan, the maximum PBGC variable premium is $5,610,000.

Therefore, the PBGC premium for a 10,000-life plan at the premium cap would total $6,440,000.

More information about various strategies to manage PBGC premiums can be found here: Managing PBGC Premiums: There is More Than One Lever.

More information regarding PBGC’s Current and Historical Premium Rates can be found on the PBGC’s website link above.

Questions? Contact the Findley consultant you normally work with, or contact Colleen Lowmiller at colleen.lowmiller@findley.com, 216.875.1913.

Published October 29, 2019

© 2019 Findley. All Rights Reserved.

Pension Mortality Updates May Decrease Liabilities

The Society of Actuaries’ (SOA) new Scale MP-2019 mortality improvement rates will lead to lower liabilities compared to the previous versions. Along with the improvement scale, the SOA’s Retirement Plans Experience Committee (RPEC) also released a set of new mortality tables, Pri-2012, both on October 23rd. The new tables and improvement scale may be used for financial reporting purposes now. The improvement scale is expected to be used in 2021 for PBGC, lump sum, and cash funding calculations.

Pri-2012 Mortality Tables

The Pri-2012 tables are the most recent private mortality tables released by the SOA since the RP-2006 tables. The SOA estimates that most plan liabilities will fall within 1.0% (up or down) of the liability they would have seen under the RP-2006 tables. The new tables were developed using data from 2010-2014 and reflect the RPEC’s commitment to update the base mortality tables every five years.

When compared to the RP-2006 tables, life expectancy for a 65 year old female remains at 87.4, while the life expectancy of a 65 year old male decreased from 85.0 to 84.7.

The new Pri-2012 tables are based on more multiemployer data compared to the prior tables. Mortality experience under multiemployer plans did not differ significantly from experience in single employer plans. The SOA determined that job classification (blue-collar and white-collar) is an increasing forecaster of mortality and more indicative of future experience than benefit amount.

The SOA identified that surviving beneficiaries had higher mortality than the general population and created separate mortality tables for this demographic with the Pri-2012 tables update.

MP-2019 Mortality Improvement Scale

The new mortality improvement scale MP-2019 is based on historical U.S. population mortality. This continues to fulfill the RPEC’s pledge to update the improvement scales annually.

Consistent with all prior updates since the first table (MP-2014) was released, the MP-2019 improvement scale will reduce liabilities for pension plans compared to the MP-2018 improvement scale. The SOA estimated that pension obligations will typically be 0.3% to 1.0% lower when compared to using Scale MP-2018.

According to the study, the observed age-adjusted mortality rate increased slightly from the prior year, yet it is fairly level relative to the last several years. Also, the age-adjusted mortality improvement rate averaged just 0.3% per year from 2010 to 2017, compared to 0.5% that was observed in the prior study from 2009 to 2016.

Implications for Pension Plans

Pri-2012 may be adopted for financial accounting disclosures and pension expense purposes. The adoption of the new tables will likely result in little change to liabilities. We expect plan sponsors will generally adopt the Pri-2012 tables to replace the RP-2006 tables.

Plan sponsors who have updated their improvement scale annually will generally adopt the MP-2019 improvement scale. As noted, it is expected to lower liabilities, and thus will result in lower pension expense.

We do not expect that the minimum funding calculations, PBGC premiums, and lump sum calculations will use the Pri-2012 table in the near future. However, the 2021 plan year will likely incorporate the MP-2019 scale based on the currently proposed intent from the IRS. Absent any other changes, this update will result in lower funding liability, PBGC liability and lump sum amounts for pension plans in that plan year.

More information regarding the Pri-2012 mortality table and the Scale MP-2019 mortality improvement scale release can be found on the Society of Actuaries’ website links above.

Questions? Contact the Findley consultant you normally work with, or contact Matthew Gilliland at matthew.gilliland@findley.com, 615.665.5306 or Matthew Widick at matthew.widick@findley.com, 615.665.5407.

Published October 28, 2019

© 2019 Findley. All Rights Reserved.

Minimum Participation Rule Puts Pension Benefits at Risk

Almost all pension plans are subject to certain compliance tests that are outlined by the IRS. The compliance requirements are in place to make sure that if a plan sponsor’s contributions to a pension plan are deductible for tax purposes, then the pension plan’s benefits must not be designed too heavily in favor of the highest paid employees. One set of compliance rules for most pension plans are the minimum participation requirements. As some defined benefit pension plans continue operating, these rules are causing compliance concerns.

Minimum Participation Rule Details

Under Internal Revenue Code (IRC) Section 401(a)(26), a defined benefit pension plan must benefit a minimum of

  • 50 employees or
  • 40% of the employees of the employer.

If the pension plan is not benefiting any highly compensated employees (HCEs), it automatically satisfies the rule.

HCE is generally determined as an individual earning more than a specified dollar threshold established by the IRS for the prior year. This dollar limit is $125,000 based on 2019 earnings to determine HCEs for the 2020 year. All others are considered non-highly compensated employees (NHCEs).

Unintended Consequences

Today, many pension plans have been “partially frozen” for years, which means they have benefits accruing only for a specified group of employees. As time passes and ordinary turnover and retirement occur, the number of employees that accrue benefits in these defined benefit pension plans is decreasing.

Although the original purpose was to provide “meaningful” benefits to employees across the plan sponsor’s organization, these requirements are now causing accruals to be shut off as some plans approach and fall below the minimum threshold of employees accruing benefits.

For the affected employees, it comes at a time close to retirement age when their promised pensions, by design, would be accumulating at the highest rates, and defined contribution style benefits, like 401k plans, can’t realistically replace all lost future accruals.

Potential Strategies

Do Nothing and Wait

  • We can hope that legislative relief will be passed to eliminate the participation issues. However, Congress has considered addressing these issues over the last 5 to 7 years, and no movement towards enacting relief rules has been seen yet.

Merge Pension Plans

  • This provides immediate relief to minimum participation issues.
  • It could be a temporary solution if the benefits are also partially frozen across the combined defined benefit pension plan. Review the demographics to project how long this solution will last when weighing the advantages of this strategy for your situation.

Open the Pension Plan

  • Reopen the pension plan to additional participants. (Yes, this could make sense!)
  • More employees will be benefiting and eliminate minimum participation rule issues.
  • New plan participants can receive a different formula (something similar to the current plan formula but reduced, cash balance formula, variable annuity formula, etc.)
  • Consider if recruiting or employee retention issues can be reduced or alleviated by designing new pension benefits for targeted employee groups.
  • This can be designed to help bridge the time until the potentially affected employees reach retirement age.
  • Watch the mix of HCEs and NHCEs because the additional pension benefit design still needs to satisfy other IRS coverage, nondiscrimination, and design-based compliance rules.

Freeze Remaining Pension Benefits

  • The freeze can be for all participants or only for current and future HCEs.
  • Replacement benefits can be provided to address employee retention and retirement readiness issues.
    • Provide projected lost benefits as cash payment(s).
    • Executive employees can have some or all lost benefits replaced in a nonqualified deferred compensation plan or other executive compensation arrangement.
    • Design partial replacement benefits in a 401k plan.
  • Consider the impact of the pension plan freeze on other sponsored benefit plans. For example, are there benefits that are automatically available, or not available, based upon whether an employee is accruing benefits in the pension plan?
  • Curtailment accounting rules are triggered which may require an additional one-time expense to be recognized through income in the year of the benefit freeze.

In Perspective

There are many valid business reasons that explain why a plan sponsor would want to stop pension accruals for everyone except a specified group. We know the IRS rules were not intended to cause the loss of benefits for employees late in their careers. Regardless, several pension plan sponsors are at the point where their partially frozen pension plans are close to becoming noncompliant. While we continue to wait for legislative relief for this issue (that may never come), if you sponsor a partially frozen pension plan, you should determine when this will become an issue for you. Begin discussing possible strategies, and have an approach in place well ahead of time to minimize the disruption to your organization as much as possible.

Questions? Contact the Findley consultant you normally work with, or contact Colleen Lowmiller at colleen.lowmiller@findley.com, 216.875.1913.

Published October 28, 2019

© 2019 Findley. All Rights Reserved.

GE pension changes: should my company be looking to do the same?

On October 7, General Electric (GE) announced a series of decisions around their salaried pension plan:

  • For participants continuing to accrue benefits, further accruals will be stopped at the end of 2020. (New employees hired after 2011 were not eligible for the pension plan.)
  • A lump sum buy-out proposal to 100,000 terminated but not yet retired participants will be offered.
  • Benefits in a supplemental plan for certain executives will also freeze.

Inevitably, whenever one of the largest pension plans in the country makes an announcement like this, it can cause executives at other companies to question if a similar decision makes sense for their plan.  The action item here most germane to other plan sponsors, and the focus of the remainder of this article, will be to focus on the middle bullet point.  Offering lump sums to non-retired, terminated participants has become a popular strategy among pension plan sponsors the last couple years as a way to reduce headcount without paying a premium to an insurance company to off-load the obligations.

Lump Sum Cashouts Defined

A Lump Sum Cashout program occurs when a defined benefit pension plan amends its plan to allow terminated vested participants to take a lump sum payment of their benefit and be cashed out of the plan entirely. The program is typically offered as a one-time window.  Plans generally may offer this type of program only if their IRS funded percentage is at least 80% both before and after the program is implemented.

Many pension plans have offered, or at least considered, Lump Sum Cashout programs over the last several years to minimize their financial risk. Plan sponsors that have implemented these programs have been rewarded with significant cash savings as well as risk reduction.

Advantages of Implementing Lump Sum Cashout Today

1. Improved Funded Status

An advantage of the current interest rate environment is that lump sums will be less than most other liability measurements related to the plan. Employers will be paying benefits to participants using a value less than the balance sheet entries being carried for those benefits in most cases. These lower lump sum payments will then help employers improve the funded status of the plan in addition to de-risking or reducing the future risk.

2. PBGC Premium Savings

The most significant benefit of offering a Lump Sum Cashout Program is the Pension Benefit Guaranty Corporation (PBGC) premium savings. The PBGC continues to increase the annual premiums that pension plans are required to pay to protect the benefits of their participants in the pension plan. The per participant portion of the premium (flat-rate) is now up to an $80 payment per participant in 2019. This is more than a 200% increase since 2012. The variable rate portion of the premium is up to $43 per $1,000 underfunded which is an increase of almost 500% since 2012.

These rates are expected to continue to grow with inflation each year. Therefore it is ideal for pension plan sponsors to reduce their participant count sooner rather than later so they can save on these future premiums. In total, some pension plan sponsors could see annual PBGC premium savings of over $600 for each participant who takes a lump sum distribution.

Other Considerations When Planning for a Lump Sum Cashout

There are some concerns that pension plan sponsors will also want to consider such as:

  • Potential increases to contribution requirements;
  • One-time accounting charges that could be triggered;
  • Potential increase to annuity purchase pricing upon pension plan termination. Note that a permanent lump sum feature may increase pension plan termination annuity pricing and cause some insurers to decline to bid.

The pension plan’s actuary should be consulted so they can properly evaluate the impact of offering such a program.

Some pension plan sponsors use lump sum cashouts as part of their pension plan termination preparation strategy. This Findley article provides tips to map your route to pension plan termination readiness. Already have a frozen plan and been considering a termination in the near future? For a complete A-Z walkthrough, check out our guide below.

Questions? Contact the Findley consultant you normally work with, or contact Amy Gentile at amy.gentile@findley.com, 216.875.1933 or Matt Klein at matt.klein@findley.com 216-875-1938.

Published on October 8, 2019

© 2019 Findley. All Rights Reserved.