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By Chuck Yanikoski
We’re well aware that when plan sponsors restructure or terminate defined benefit pensions the primary reasons are financial. But we also know that finances don’t tell the whole story, and we know that if you’re the plan sponsor, you know it, too. Still, while all the spreadsheets and legal documents are shuffling back and forth, it’s easy to temporarily lose sight of the impact on individual plan participants. One of our goals here at CREWS is to help assure that this doesn’t happen. Participant concerns matter for three kinds of reasons: legal, business, and moral.
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By Chuck Yanikoski
Sure, we know that some DB plan participants receiving lump sum offers don’t need advice at all. Sometimes the distribution is too small to matter, or the participant’s personal situation makes the right choice glaringly obvious. But these are the exceptions. Most plan participants do need advice, and so the question is: what kind? By Steve Richards
One might think DB plan sponsors looking to terminate their frozen plans are feeling increasingly sanguine after a great year of stock market performance. However, the funded status of plans has barely budged over the last year with the Milliman index increasing a scant .3% to 84.1% from 83.8% since the beginning of 2017. This would seem to beg the question: If you can’t get ahead with a raging stock market, how are things going to look if things go south? This is the essence of de-risking and why many plan sponsors are planning to terminate, or at least take a big chunk out of their risk profile through partial buyouts. By Michael Lee
On October 3, 2017 the Department of Treasury and IRS released final regulations on the mortality tables plan sponsors must use beginning in 2018 for defined benefit plans, per the Pension Protection Act of 2006. These tables are to be used to determine funding requirements, lump sum calculations and other acceleration of benefit calculations. On October of 2014, the tables were released in two reports released by the Society of Actuaries (SOA), the RP-2014 Mortality Tables Report and the Mortality Improvement Scale MP-2014 Report. Each of these reports contained new mortality assumptions recommended for valuing private-sector pension liabilities. Interest rates are key to deciding upon de-risking moves as they drive the liabilities, lump sums, the cost of annuities, the value of fixed income assets, and the cost of financing. Such transactions always seem to come down to interest rates.
Generally speaking, as interest rates increase, liabilities are driven lower – and the cost of lump sums and annuities decrease. So, other things remaining the same (which they never do, of course), firms tend to wait for rates to move higher if they are anticipating de-risking moves. As the GAO, DOL, IRS and others have noted, the current process of offering lump sum elections during lump sum windows and terminations leaves much to be desired. So much so that the title of the GAO’s landmark 2015 report reads:.
“Participants Need Better Information When Offered Lump Sums That Replace Their Lifetime Benefits" February 2015, U.S. General Accounting Office We couldn’t agree more… |
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