December 2013 Archive

2014 pension de-risking: deferred vested liability

December 19, 2013

In this article we discuss how increases in interest rates and increases in the Pension Benefit Guaranty Corporation's (PBGC) flat-rate premium have made ‘de-risking’ more attractive in 2014. For purposes of this article, by de-risking we mean paying out a participant's benefit as a lump sum and thereby eliminating the related liability, and our focus will be on plans’ ‘deferred vested’ liability, which is often the ‘low hanging fruit’ of de-risking. Read More

Concerns over pension de-risking

December 19, 2013

This summer the ERISA Advisory Council (EAC) held hearings on "Private Sector Pension De-Risking and Participant Protections," and on November 5, 2013 the EAC issued summary findings and recommendations. At the hearings a number of participant advocacy groups raised issues with aspects of current defined benefit plan de-risking practice. In this article, describe the issues being raised by participant advocacy groups and conclude with a review of the EAC's recommendations. Read More

IRS provides temporary relief for ‘closed plan’ nondiscrimination issue

December 18, 2013

In September we posted an article on the treatment of frozen plans under Tax Code nondiscrimination rules. In December 2013 IRS released Notice 2014-5, providing temporary relief from the ‘frozen plan problem’ for 2014 and 2015 for plans that meet certain conditions. In this article we briefly describe the relief. Read More

PBGC variable premium vs. borrow-and-fund: impact of higher premiums

December 13, 2013

The gist of the prior article was that Pension Benefit Guaranty Corporation (PBGC) variable premiums create an incentive for pension sponsors to borrow money and contribute it to their plan – the higher the PBGC variable premium rate, the stronger the case for borrow-and-fund. Given the significant increase in variable-rate premiums included in the Ryan-Murray bi-partisan budget deal (the Bipartisan Budget Act of 2013 (BBA 2013)), we thought it would be useful to re-visit our article on variable premiums vs. borrow-and-fund. Read More

Increased PBGC premiums in budget deal

December 11, 2013

On December 10, 2013 Congressman Ryan (R-WI) and Senator Murray (D-WA) announced a bi-partisan budget deal, the Bipartisan Budget Act of 2013 (BBA 2013). The proposal includes increases in PBGC premiums for single-employer plans, as follows: Read More

PBGC premium increases and the FY2013 annual report

December 11, 2013

On December 10th, Congressional budget negotiators agreed on a short-term deal intended to forestall federal budget crises for the coming year. As part of the deal, PBGC premiums will increase substantially compared to current law beginning in 2015. In this article, we review PBGC's finances and consider the case for higher premiums. Read More

Variable annuity designs: promise and pitfalls

December 10, 2013

While corporate America continues to move away from defined benefit (DB) plans, these designs have enjoyed a sharp uptick in popularity in some market segments in recent years. The trend is due in part to enabling legislation (the Pension Protection Act (PPA), enacted in 2006), which has sparked a wave of innovative plan design solutions. However, there are significant employer risks associated with Variable Annuity design, particularly when combined with a lump sum payment provision. Read More

Retirement income: the value of deferring Social Security

December 04, 2013

In this article we are going to focus on one specific issue under current Social Security rules: the relative utility of deferring the commencement of a participant's Social Security benefit to age 70. (To be clear: we are talking about the deferral of the commencement of Social Security, not the deferral of retirement.) We discuss this issue because it has implications for the design of DC/401(k) payout options and for participant retirement planning. Read More

Is age 70 retirement the ‘new normal’?

December 03, 2013

If you think about a retirement benefit as an in-kind benefit – e.g., every employee needs enough money to replace 70-80% of her preretirement income – then the cost of providing that benefit has doubled in the last 13 years. Why? Because interest rates have declined by 400 basis points since 2000. The impact of this change isn't subtle, there's no question, declining interest rates are squeezing retirement savings – and something has to give. Read More

November 2013 Pension Finance Update

December 02, 2013

November saw a continuation of very good news for pension sponsors, a microcosm of a phenomenal 2013 – driven by rising stock markets and higher interest rates. The two ‘model’ plans we track each saw improvements, with traditional ‘Plan A’ seeing a 3% improvement in funded status, while the more conservative ‘Plan B’ improved almost 1% during November. For the year, Plan A is now up 23% and Plan B is up more than 6%. Download

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