Powerful Insights from Interactive Forecasting of Defined Benefit Pension Plan Results

With the current volatility in long-term bond rates and in the investment market, plan sponsors should examine the impact of the market on the future of their defined benefit pension plan.

The market downturn due to COVID-19 severely impacted the funded status of defined benefit pension plans, and the ramifications could project out many years into the future.


Financial experts at any organization will agree that one of the problems with defined benefit pension plans is the volatility of cash funding requirements due to the sensitivity of the plan measurements to changes in the market. Many plan sponsors seek strategies to keep cash requirements as level as possible.

The difficulty for many stakeholders at organizations that sponsor defined benefit pension plans lies in understanding how the various factors are interrelated so that there is confidence in decisions made to improve the defined benefit pension plan’s financial position.

The following case study illustrates the power of interactive modeling on understanding the extent that different variables, like cash contributions, long-term bond rates, and asset returns, affect the future outlook for the defined benefit pension plan.

Case Study

The plan sponsor of a frozen defined benefit pension plan has been closely following the funded status of the plan. Based on annual forecasts, they developed a strategy with their actuary to contribute $5 million per year to be well enough funded to consider a plan termination in seven years.

Powerful Insights from Interactive Forecasting of Defined Benefit Pension Plan Results

The market downturn due to COVID-19 significantly changed this forecast. The actuary updated the current forecast to recognize the decrease in the market value of assets, lower bond rates for valuing liabilities, and lower expected rate of return for 2020 and 2021.

The updated forecast showed that the required contributions were no longer level and more than doubled compared to their original strategy due to overriding minimum funding rules, and the plan termination time horizon had extended to twelve years.


The plan sponsor worked with their actuary and asset advisor to model various “what if” situations quickly using an interactive modeling tool. Visually seeing the impact of future changes in the various economic variables on the defined benefit pension plan, helped to develop an approach for usage of available cash and to formulate next steps to monitor the defined benefit plan’s financial position.

Powerful Insights from Interactive Forecasting of Defined Benefit Pension Plan Results

Interactive Forecasting Results

Different variables were changed in several variations of the projections, and some great information was obtained:

  • If looking at contributions alone and trying to achieve level amounts, doubling the contributions to $10 million only shortens the plan termination funding time horizon to eleven years.
  • When considering level contributions of $7.5 million, there are a few years in the projection period when those contributions are not enough, but the plan termination funding time horizon remains at twelve years, and they would have saved some cash, especially in the short term.
  • If contributions are increased to $7.5 million, AND there is some economic recovery in 2021, then level contributions can be achieved.

Instead of needing to (somewhat blindly) decide to double contributions and to continue that for the foreseeable future, the interactive forecast showed that even a modest economic recovery has more of a long-term effect on the defined benefit pension plan’s results and plan termination time horizon than large additional cash contributions alone. Increasing planned contributions somewhat, and regrouping and using the interactive forecasting tool with updates periodically is the best short-term strategy for them.

Without the interactive tool, it would not have been apparent that waiting for some economic recovery was the right approach for now. It also would not have been clear that contributing higher amounts (within reason) in the hopes of getting things back on track actually does nothing to achieve that goal. That kind of insight is valuable when working on organization-wide approaches for allocation of cash, while also being responsible about trying to put future strategies like defined benefit pension plan termination back on track.

To discuss interactive projections for a defined benefit pension plan, plan sponsors should reach out to their actuary. Alternatively, contact Colleen Lowmiller in the form below, and with just a little information, Findley’s actuaries can put together interactive forecasting information to assist with strategy sessions.

Published on August 27, 2020

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Take Stock of Your ESOP Distribution Policy

It’s plain and simple: if your company’s Employee Stock Ownership Plan (ESOP) lacks a distribution policy, there may be no defined rules for when and how participants are paid from the plan. A distribution policy is a key component of an ESOP and should include timing, method, and form of payment.

Committee of Stakeholders

Developing an ESOP distribution policy begins by gathering a committee of company stakeholders – representatives from the executive team, human resources, shareholders and trustees. This policy group should focus on developing a well-written ESOP distribution policy that considers the employee benefit, ownership and corporate objectives, and their relative importance. An ESOP distribution policy:

  • Provides details for distribution to participants
  • Ensures adherence to legal requirements outlined in the plan document and the Internal Revenue Code (IRC)
  • Ensures the method of payment is nondiscriminatory and nondiscretionary
  • Simplifies administration of the plan
  • Aligns distributions from the plan with the company’s financial objectives
  • Supports the company’s philosophies and ESOP culture 

Ultimately, the committee will set rules related to when and how ESOP participants will be paid from the plan.

Take Stock of Your ESOP Distribution Policy

Timing of Payment

As the committee weighs the timing of ESOP benefits, one of the guiding factors should be based on the company’s overall goals and objectives. Deferring payments until the required deadline:

  • Allows for a longer planning horizon
  • Slows the reallocation of shares and repurchase obligation
  • Reduces the incentive participants may have to quit in order to gain access to their ESOP benefit

The committee may choose to provide immediate payment of ESOP benefits to participants who have terminated employment. Immediate payment allows the organization to:

  • Remove stock from accounts of terminated participants
  • Allocate shares to newer employees sooner, which addresses “have/have not” concerns typical in more mature ESOPs
  • Ease administration of the plan

Whether the committee opts to defer ESOP benefit payments or make them immediately upon the participant’s termination, it’s important to follow IRC regulations (IRC §409(o)) for ESOPs which set specific rules for distributions due to death, disability or normal retirement, as well as termination for any other reason.

In the event of death, disability or normal retirement, participants are entitled to ESOP benefits no later than one year after the end of the plan year in which the event occurs. A participant who retires in 2020, is entitled to payment of their ESOP benefit before December 31, 2021.

For participants who terminate employment for any other reason, benefits must be provided no later than six years after the end of the plan year in which the event occurs. A participant who terminates employment in 2020, is entitled to their ESOP benefit before December 31, 2026.

There are additional ESOP distribution rules (IRC §401(a)(14)) that must also be applied, including:

  • Age 65 or the plan’s normal retirement age (if earlier)
  • 10th anniversary of the date the participant entered the ESOP

In some instances, a participant’s request to delay an ESOP payment may be permissible. For example, an employee may wish to delay receiving their payment under the IRC’s required minimum distribution rules (i.e. attainment of age 72), instead of age 65. Rules addressing these delays should also be addressed during the formulation of the distribution policy.

Method of Payment

The ESOP distribution policy establishes the method of payment for the benefit: lump-sum, installments or alternative options based on the participant’s account balance. In accordance with IRC §409(o), installment payments should be:

  • Substantially equal payments
  • Made at least once per year
  • Fully paid within a five-year period (large balances can be paid over an additional five years)

The policy may also provide an option to make lump-sum payments for balances that are below a certain threshold (e.g. $10,000 or $20,000) and installments for balances above the threshold.

The committee should consider the company’s objectives as it chooses the ESOP payment method.

Installment Payments:

  • Help spread the overall distribution funding requirements over a longer horizon
  • Contribute to smoother plan benefit levels

Lump-Sum Payments:

  • Limit terminated participants from receiving future S-distributions/C-dividends
  • Help concentrate the shares held in the plan to primarily active employees

Form of Payment

The ESOP distribution policy should also define the form of payment – cash, stock or a combination. IRC 409(h) provides specific distribution rules for ESOPs, including participant rights to demand distribution in the form of employer securities and (if not readily tradable) have the employer repurchase the shares at a fair valuation.

Mandatory cash distributions are permissible in certain instances:

  • S Corporation ESOPs
  • When an employer’s charter or bylaws restrict substantially all ownership to the ESOP or current employees
  • Bank ESOPs

Just as the timing and method of the ESOP payment align with the company’s objectives, the form of payment should also be set with the organization’s goals in mind. When payments are made in stock:

  • Shares are distributed and redeemed by the company (Payment is either a lump-sum payment or installments backed by a promissory note, which must be adequately secured by the company)
  • Participants may be eligible for capital gains treatment on the difference between the market value and their cost basis (net unrealized appreciation (NUA))

If cash is the chosen form of payment, the distribution funding will typically consist of employer contributions to the ESOP or through S-distributions/C-dividends.

Other Considerations

While the ESOP distribution policy committee will focus primarily on the timing, method and form of payment, the group should also address these topics which may impact plan distributions:

  • Account segregation
  • Qualified Domestic Relation Orders (QDROs)
  • Events after termination
  • Forceout distributions
  • Diversification

Questions about ESOP Policy Distribution? Contact the Findley consultant you normally work with or Aaron Geibel in the form below.

Published June 3, 2020

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Compensation and Retention Strategies for Healthcare Executives

To thrive today, healthcare organizations must provide competitive compensation and implement strategies to recruit and retain talented executives. Short- and long-term incentive plans – along with retention arrangements – are increasingly being tied to successfully vying for healthcare’s top talent.

Healthcare organizations compete for the best leadership talent by offering a unique and compelling value proposition that includes a balance of mission served, performance challenges, engagement of diverse stakeholders, and competitive compensation.

It’s essential that these organizations use total rewards strategies to successfully guide the design, administration and governance of their pay and benefit programs. The strategy should be developed and designed to support the organization’s strategy (i.e. incent growth and performance, utilize the financial resources of the organization, etc.) and culture. Top-performing health systems have written strategy statements that are board-approved and shared with existing and potential employees.

Compensation and Retention Strategies for Healthcare Executives

The value of benefits and perquisites make up a smaller percentage of executive total rewards. There are fewer executive benefits (i.e. executive medical insurance, supplemental disability plan, etc.) and many organizations are offering executives the same benefits offered to other employees. Limited executive perquisites are the new norm and any enhanced benefits and/or perks must be justified as having a legitimate business purpose.

Establish a Compensation Strategy for Executive Talent

Compensation is a key element of the total rewards strategy to attract and retain the best leadership, and healthcare systems should develop a compensation framework that includes:

  • Base salary
  • Short-term incentives
  • Long-term incentives
  • Retention incentives

Base Salary

Base salary is fixed compensation that typically does not vary according to performance or organizational results. It pays for experience, knowledge and individual performance. It is common practice to establish and maintain a salary administration program with two objectives: providing base compensation that is competitive with the market, and controlling fixed costs. In addition, the program should ensure that pay is internally equitable when compared to similar positions within the organization.

The majority of organizations target base salaries at the market median, which is the 50th percentile. Likewise, recent surveys and Findley’s industry experience indicates 65% of healthcare organizations target leadership base salaries at the market median. The next most popular target, used by 15% of organizations, is to set the range at the 60th or 65th percentile of market.

In practice, not all salaries will be equal to the target and there are a number of valid reasons why salaries may vary from the target. The salary administration program has pay ranges that allow management and the board flexibility to determine salaries by evaluating factors that include individual experience, market rates, length of service and business needs.

Short-Term Incentives

Top-performing organizations design short-term incentive plans, (also know as annual incentive plans), to award incentives using an objective and disciplined approach. The plan should reinforce the philosophy that executives are connected to organizational results; it should motivate and drive appropriate behaviors and deliver rewards that are in alignment with organizational success and growth.

“Recent research and Findley’s industry experience, indicate formal short-term incentive plans are used in more than 75% of healthcare organizations.”

Compensation and Retention Strategies for Healthcare Executives Guide

Long-Term Incentives

Long-term incentive plans are emerging as important components in compensation strategies for healthcare systems as the plans prove valuable in retaining and recruiting top talent. Based on market studies and Findley’s experience, offering long-term incentive plans varies by the size of the organization, with more than 40% of organizations with net revenue greater than $2 billion featuring long-term incentive plans in their compensation programs.

As organizations look for long-term performance-based compensation solutions, there are a variety of options to consider. One solution that is growing in popularity is a performance-based long-term incentive plan that awards cash at the end of a multi-year performance period based on the achievement of predetermined goals.

“Boards of directors in this pay-for-performance era are seeking alternatives to deliver long-term performance-based compensation.”

Compensation and Retention Strategies for Healthcare Executives Guide

Another approach that is becoming more common is the “performance-based” SERP. This combines the planning and techniques used for defined contribution SERPs, along with the performance measurements of an annual incentive pay plan. This option offers competitive long-term compensation, assuming adequate levels of sustained annual performance.

Long-term incentive plan options vary, too, between for-profit and non-profit healthcare organizations. For-profit healthcare systems are able to include some type of “equity” award in the total compensation package for executives. Executives in the non-profit, tax-exempt healthcare environment lack the opportunity of real “ownership.” Measuring long-term value is even more important with a tax-exempt organization because the “shareholders” are taxpayers and members of the community.

Historically, long-term plans have been merely an accumulation of short-term metrics over a multi-year period. The trend has shifted and long-term or value-focused metrics force a more strategic or visionary view of future guideposts for success. While financial results remain important, organizations are including more measures that focus on growth, market share, community impact, and employer brand.

Retention Incentives

One component that has seen significant growth over the last several years is the implementation of retention compensation. The healthcare industry in particular has been on the forefront due to the recent and expected future consolidation of hospitals and healthcare systems.

Often, retention incentives occur in instances of an anticipated transaction which requires continuity in order to execute transition plans and maintain the ongoing value of the enterprise. It can be essential to ensure that key talent is retained, operating functions are held intact, and relationships are maintained during a significant transition (i.e. pending sale, reorganization or new leadership).

The structure of retention arrangements varies as some organizations may choose to incorporate retention benefits within individual employment agreements, while others create standard agreements or policies for groups of executives.

Learn more about our findings and the solutions to implementing effective and creative strategies to recruit and retain talented executives in the healthcare industry in this guide below:

Compensation and Retention Strategies for Healthcare Executives Guide

Design and Implement an Effective Compensation Strategy

The healthcare industry is going through significant transformation and it is imperative for organizations to have well-designed executive compensation programs with retention strategies to recruit and retain top talent. Designing and implementing effective plans requires:

  • Taking a total rewards and total compensation planning perspective;
  • Aligning the compensation plan design with the mission and strategies of the organization;
  • Creating and maintaining conditions that are favorable to delivering competitive compensation and;
  • Designing retention strategies that align the interests of the executives with the stakeholders.

Questions or need advice on implementing an effective compensation strategy or successful incentive programs at your organization. Please contact Jen Givens or Tom Hurley by filling out the contact form below.

Published May 15, 2020

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