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Pension strategy

DB Plan Terminations – Some Basics

The combination of higher interest rates and a strong stock market have significantly improved pension funding. For some sponsors looking to exit the DB system, this improvement in funding may put them in a position to consider plan termination. In this article we briefly review some of the key issues the project of terminating a plan presents.

Retirement savings finance at the end of 2020

Bottom line: interest rates have stabilized since mid-Summer (near all-time lows) while asset performance has improved dramatically, leaving DB plans on-net slightly better off than they were at the beginning of the year. DC participants – who are generally (on average) younger than DB participants, with longer durations, and thus more affected by 2020 interest rate declines – did (on average) less well, notwithstanding strong asset returns.

2020 lessons learned – annuity settlements for small benefits

Even for plans not at the VRP headcount cap, with respect to (relatively) smaller benefits, annuity settlement may be an efficient strategy. For almost all pension plans, there exists a threshold, greater than zero, below which these settlements make sense.

2020 lessons learned – lump sum de-risking in the context of steeply declining interest rates

Defined benefit plan valuation interest rates have declined nearly 200 basis points since late 2018. Interest rate stabilization has significantly mitigated the effect of this decline on plan funding. GAAP accounting (e.g., balance sheet disclosure) is, however, indexed to current rates, and the steep declines in interest rates have presented a number of challenges and opportunities for defined benefit plan sponsors.

Measuring UVBs for variable-rate premiums – the alternative vs. standard method election

Defined benefit plan sponsors that (1) currently using the standard (spot-rate) method to determine unfunded vested benefits (UVBs) for purposes of calculating Pension Benefit Guaranty Corporation variable-rate premiums, and who (2) have the ability to elect to switch to the alternative (24-month average) method, may have an opportunity to reduce (in some cases significantly) 2020 variable-rate premiums by doing so.

DB contribution timing 2020

DB contribution timing is critical with respect to at least three issues – ERISA minimum funding, Internal Revenue Code tax deductions, and the calculation of unfunded vested benefits (UVBs) for purposes of determining Pension Benefit Guaranty Corporate variable-rate premiums.