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2016 Pension Update: Change is Constant. Now What?
Amy Gentile, EA, M.A.A.A., Senior Consultant
Jill Leitner, Senior Consultant
Wednesday, November 18, 20152:00 PM – 2:45 PM Eastern Time
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Agenda
• 2015 Mortality Update
• Bipartisan Budget Act of 2015
PBGC premiums
Extension of HATFA funding relief
• Granular Accounting
• Q&A
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2015
Mortality
Update
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Mortality Update – Quick Review
• SOA released a new mortality table in October 2014 : RP-2014
• The new mortality table was the first update since the year 2000
• The table reflected longer life expectancies
• Multiple versions of the table were released:
⁻ Total Dataset
⁻ White Collar
⁻ Blue Collar
⁻ Disabled
• Generational Projection Scale MP-2014 published with table
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Impact of New Mortality Tables
Increased Life
Expectancies
Longer Expected
Cash Flows
Increased Liabilities
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Application of RP-2014
• Auditors encouraged application with all Fiscal Year Ends after release of table
• Application is only for accounting at this time
• Tables have not been released or mandated for IRS minimum funding calculations, PBGC premiums, or 417(e) lump sum calculations
• Various adoption methods• Adopted RP-2014 with published MP-2014• Adopted RP-2014 with alternative projection scale• Chose to delay adoption
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Latest Mortality Update
• SOA released new projection scale MP-2015 on October 8, 2015
• How is it different from MP-2014?
• Reflects two additional years of experience
• Lower future mortality improvement
• Tables are still not mandated
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Adoption of MP-2015
• Plan Sponsors should discuss MP-2015 with their auditors and actuaries to review adoption options
• Generally the following will be the approach:
RP-2014 with MP-2014
Update to MP-2015
1%-2% decrease in liabilities
RP-2014 with Alternative Scale
Continue with Alternative scale
Discussions with actuary /auditor are encouraged
Delayed Adoption
Discussions with actuary/auditors are encouraged
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Bipartisan
Budget Act
Of 2015
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What is the New Pension Legislation?
Bipartisan Budget Act of 2015
Signed on November 2, 2015
Part of the revenue for this bill comes from pension funding relief
Intent to increase Federal tax revenue
PBGC Premium Increases
Both per-participant premium and variable rate premium increases
HATFA Funding Relief Extension
For plan years 2018-2024
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Further Increases to PBGC Premiums
Current Law – Increases beyond 2016 reflect inflation increases only
New Law Changes –
Year Per-Participant
Premium
Variable Rate Premium
(per $1,000 of underfunding)
Variable Rate Premium Participant
Cap
2015 $57 $24 $418
2016 $64 $30 $500
2017 $69 $33* $500*
2018 $74 $37* $500*
2019 $80 $41* $500*
2020 $80* $41* $500* *Reflects only the fixed increases; additional inflation component is yet to be added
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Future Trends
Look at PBGC Premiums to determine funding strategy
Contribute more to the plan or reallocate contributions to reduce underfunding
No impact if hit the participant cap
Increase in the number of deferred vested buyouts and retiree annuity purchases
Decreases the per-participant premium
Little to no impact on the variable rate premium unless the participant cap applies
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Example on How to Reduce PBGC Premiums
No Additional Contributions
Reallocate Contributions
Vested Premium Funding Target $150,000,000 $150,000,000
Market Value of Assets 140,000,000 140,000,000
Contributions Made After Year End Allocated to the Previous Plan Year
0 1,250,000
Market Value of Assets Plus Discounted Accrued Contributions
140,000,000 141,000,000
Unfunded Vested Benefits 10,000,000 9,000,000
Variable Rate Premium ($41) $410,000 $369,000
Reduce Underfunding
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Valuation Interest Rates – Quick Review
• Pension Protection Act of 2006 (PPA) – introduced three segment rates based on the average of corporate bond yields over the last 24 months.
• Moving Ahead for Progress in the 21st Century (MAP-21) –passed in 2012. Sets a corridor to the PPA rates based on a 25 year average of treasury corporate bond interest rates. Scheduled increase in corridor until 2016.
• Highway and Transportation Funding Act of 2014 (HATFA) –Extended the scheduled corridor increase five more years. Ultimate rates reached in 2021.
• Bipartisan Budget Act of 2015 – Extends the scheduled corridor increase three more years. Ultimate rates reached in 2024.
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Extension of HATFA Funding Relief
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Example on Impact of the Corridor on the Minimum Required Contribution
90%/110% 80%/120% 70%/130% Pre-Map 21
Actuarial Value of Assets $26,600,000 $26,600,000 $26,600,000 26,600,000
Funding Target 27,600,000 29,700,000 31,900,000 33,800,00
Effective Interest Rate 6.08% 5.42% 4.77% 4.29%
Prefunding Balance $2,000,000 $2,000,000 $2,000,000 $2,000,000
Funding Shortfall 3,000,000 5,100,000 7,300,000 9,200,000
FTAP 89.13% 82.83% 77.12% 72.78%
Normal Cost $500,000 $530,000 $560,000 $580,000
Shortfall AmortizationCharge
500,000 830,000 1,170,000 1,420,000
Minimum Required Contribution
$1,000,000 $1,360,000 $1,730,000 $2,000,000
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Impact of Pension Relief - Pros
• Reduced Contribution Requirements for years 2018-2024
• Can build up Prefunding Balance for future requirements
• Higher Funding Percentages
• Avoid benefit restrictions
• Avoid At-Risk status
• Reduce 436 contributions
• Eliminate shortfall bases
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Impact of Pension Relief - Cons
• Pension plan Band-Aid
• Changes plan funding into a pay later instead of a pay now
• Decreases future actuarial value of assets
• Restricted forms of payments may no longer be restricted
• Accounting funded status suffers
• PBGC premiums increase
Pay Later Decrease Asset Value Funded Status Suffers
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Granular
Accounting
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Current Standard Aggregated Method
• Selection of Discount Rate
• Same Discount Rate used for Service Cost and Interest Cost to determine Pension Cost
Yield Curve Spot Rates
Expected Cash Flow
Equivalent Single Rate
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Implications of Single Rate
Service Cost is
Overstated
Interest Cost is
Understated
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Pros and Cons of Aggregate Method
Pros
• Simple Calculation
• Straight Forward
• No year end gain/loss if discount rate remains level
• Reduced volatility
Cons
• Calculation is more of an approximation
• Plan amendments and demographic changes have a significant impact on discount rate
• Cost component measures may vary based on split of obligations groups
• Some reliability on stable demographics
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Alternative Granular Methods
• Apply individual spot rates
• Determine Service Cost and Interest Cost at each spot rate
• Underlying assumption is that each spot rate is attached to a cash flow, so the rates shift with the maturity of the cash flow
• Other Alternatives available
• SEC has only approved the individual spot rate approach
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Impact of Granular Methods
Forward Rates Spot Rates First Year
Service Cost
Interest Cost
Combined
5-6%
9-10%
0-4%
5-6%
13-15%
8-11%
5-6%
70-80%
30-50%
• Younger plans will have different results than mature plans• Source: American Academy of Actuaries
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Pros and Cons of Granular Methods
Pros
• Service cost calculation is more accurate
• No dependence on stable demographics
• Cost component measures are the same regardless of how obligations are split
Cons
• Calculation is more complicated
• Calculation is less transparent since multiple rates are used
• Increase in year end discount rates are necessary to avoid experience losses
• Increased volatility
• Settlement costs increase
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Other implications
• Mark-to-Market as current approach (immediate recognition)
• Annual Cost doesn’t change between aggregate and granular
• Change in service cost and interest cost is shifted to gain/loss recognition at year end
• Corridor Method as current approach
• Current pension cost may decrease
• Future pension costs will then increase due to the greater experience losses or lower experience gains
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Is granular accounting right for my plan?
Settlement Costs an Issue?
Is Increased Volatility Acceptable?
Do you split pension cost across multiple groups?
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Plan Sponsor Action items
Determine what is important
• Do we need to update my mortality assumption?
• What are ways to reduce PBGC premiums?
• How do we develop a funding strategy?
• Should we reduce cash contributions now or later?
• Could we benefit from the granular accounting methods?
Talk to your actuary
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Questions?
Webinar recording will be available by Friday.
• www.findleydavies.com
Amy Gentile, 216.875.1933, agentile@findleydavies.com
Jill Leitner, 216.875.1919, jleitner@findleydavies.com
Thank you!
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