Current outlook – August 2017

August 29, 2017

In this Current outlook we discuss: legislation introduced in Congress that would reduce Pension Benefit Guaranty Corporation premiums and take premium decreases/increases off-budget; the re-classification of IRS’s mortality table update as “Economically Significant;” the wind-up of the myRA program (and its policy significance); and (very briefly) the effect of possible tax reform legislation on retirement savings tax incentives.

Bill introduced to lower PBGC premiums and take decreases/increases off-budget

On July 28, 2017, Congressmen Kelly (R-PA) and Kind (D-WI) introduced the Rightsizing Pension Premiums Act of 2017 (H.R.3596). The legislation (if passed) would do three things:

1. Change how the funded status of the PBGC’s single employer program is calculated by: (1) taking into account only those liabilities that have been transferred to PBGC; and (2) valuing liabilities using the same methodology/assumptions used for plan funding (other than interest rate stabilization rules).

2. Reduce single employer PBGC premiums if certain PBGC funding targets are met. PBGC flat-rate premiums are currently scheduled to increase in 2019 to $80 per participant, and variable-rate premiums are scheduled to increase to (at least) 4.2% of unfunded vested benefits (UVBs) (or $42 per $1,000 of UVBs). (Variable-rate premiums are also subject to a headcount cap.)

The following table summarizes the proposed funding-based premium decreases. Just to be clear: under the proposal, premium reductions depend on the PBGC single employer program’s funded percentage (calculated as described in 1, above), not the funded percentage of the sponsor’s plan.

Proposed premium decreases based on funded percentage of the PBGC single employer program

If funded percentage for 2 prior years is Flat-rate premium/per participant is Variable-rate premium/per $1,000 of UVBs is
110% or greater $19 $9
100% or greater but less than 110% $30 $9
90% or greater but less than 100% $64 $28

3. Take PBGC premiums “off-budget,” by providing that “any provision that increases or decreases, or extends the increase or decrease of, any premiums payable to the Pension Benefit Guaranty Corporation shall not be counted in estimating the level of budget authority, outlays, or revenues” in the Congressional budget process. It’s not exactly clear how this provision would work. Increases in PBGC premiums, e.g., in 2006, 2012, 2013, and 2015, have already been counted in the budget. The proposed legislation would (apparently) disregard the (negative) effect on revenues of future decreases in premiums (e.g., pursuant to the reductions described above).

The prospects for passage of this legislation are unclear. It appears to finesse the issue of revenue loss resulting from premium decreases. It (or some version of it) might (or might not) qualify to be wrapped into budget reconciliation legislation. Whether Congressional leadership – Republican and Democrat – will, however, be willing to give up the ability to pad the budget by increasing PBGC premiums is questionable.

IRS sends mortality tables to OMB, re-classified as “Economically Significant”

As discussed in our article IRS proposes new mortality tables for DB plan valuations, at the end of 2016 IRS proposed new mortality tables, derived from the RP–2014 Mortality Tables published by the Society of Actuaries in 2014, which include significant mortality improvements and consequently generally increase the value of traditional DB plan benefits. The proposed regulation would generally be effective for 2018 plan years.

On August 9, 2017, IRS sent final regulations to the Office of Management and Budget. In a significant development, the regulations were re-classified as “Economically Significant.” That means that they will be given a heightened scrutiny by OMB, taking into account (among other things) the requirements of Executive Order 13771 – the “2 for 1” Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs.

Treasury is winding down myRA program

In a notice on the myRA website, the Department of the Treasury announced that it was “winding down” the myRA program. An accompanying Treasury press release stated that the wind-down decision was taken after a review that found that “there has been very little demand for the [myRA] program, and the cost to taxpayers cannot be justified by the assets in the program. Fortunately, ample private sector solutions exist, which resulted in less appeal for myRA.”

The myRA program can be seen as part of the Obama Administration’s search for a government solution to the challenge of reducing the cost of retirement savings. As such, it is just one piece of the (Obama) Department of Labor’s encouragement of state-run auto-IRAs and open MEPs. (In this regard see, e.g., our article DOL proposes regulation and releases Interpretive Bulletin authorizing state plans.)

The efforts by DOL were controversial. There were complaints that DOL ERISA “waivers” for state-run plans provided them with a competitive advantage. In that regard, myRAs themselves provide a federally subsidized investment: they are invested in federal Thrift Savings Plan “G Fund” securities. As explained in a 2016 House Budget Report, G Fund securities provide “a long-term rate on what is essentially a short term security.”

The winding down of the myRA program is – along with the Congressional Review Act “repeal” of the DOL regulations providing a “path forward” for state auto-IRA programs – another indication that the Trump Administration is going to roll back this policy initiative. And that the Trump Administration appears to have some commitment to private sector solutions – as indicated in the press release language quoted above.

Tax Reform

Many are saying that, with the (apparent) failure of their efforts to repeal the Affordable Care Act, Republicans will make passage of tax reform legislation, or perhaps more modest tax cuts, their top legislative priority.

“Rothifying” participant 401(k) contributions remains on the table as a way to fund tax rate reductions. We provided an article reviewing how this would work and its possible effect on participant behavior in April, 2017. The need to reduce personal and corporate tax rates thus far appears – in the view of, e.g., Republican Congressional leadership – to be outweighing any possible negative effect on participant savings behavior of such a change.

Also provided in April, 2017 – a detailed discussion of how tax reform changes in personal, corporate and investment tax rates may affect the retirement savings “tax deal.”

Staffing the Trump Administration

Finally, we note that the Trump Administration has still not announced a new DOL Assistant Secretary for the Employee Benefits Security Administration (EBSA) or Treasury Deputy Assistant Secretary for Retirement and Health Policy.

* * *

We will continue to follow these issues.

October Three Consulting, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.

Through effective plan design strategies October Three believes successful financial outcomes are achievable for employers and employees alike. A critical element of those strategies is the ReDB® plan design. The ReDefined Benefit Plan® represents an entirely new, design-based approach to retirement and to the management of both the employer’s and the employee’s financial risk, focusing on maximizing financial efficiency and employee value.

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