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!