January 2015

DB digest Best Practices for Administration

UPCOMING KEY DATES Are Dead?

1/13/15 David Benbow, CPC

Post 2013 Form 5500 (Annual Return/ During the last few decades, there has This pre-ERISA article looks 30 years into the Report of Employee Benefit Plan) basic been much talk about the demise of the future and Bill imagines himself discussing the plan information and 2013 Schedule SB defined benefit (DB) pension plan. I’ve state of pensions with another retiree in the (Actuarial Information) on the plan sponsor’s been administering pensions for a quarter year 2000 over a game of horseshoes. existing intranet site, if 2013 Form 5500 was century and have seen many legislative and The name of the article was “Pensions filed on 10/15/14; if filed prior to 10/15/14, the economic changes during that time. Because Are Dead.” deadline is 90 days from the date of the filing. my livelihood has depended on DB plans for my entire career, I’m holding out hope that Bill elaborates by saying, “They didn’t 1/31/15 they still have some life left. Still, no one can die, they were killed!... It was a slow Pay to participants the increase in monthly say with certainty what will become of them. strangulation, and the victim went down age-70-1/2 required minimum distribution Are they dead? Will they freeze, one by one, slowly, if passively, so hardly anyone looks (RMD) to reflect additional benefits and be terminated or will they re-emerge in at it as a killing.” Reading this article from accrued in 2014. a new form (such as longevity plans)? 1970 is like opening a time capsule. And, while Bill Halvorson didn’t predict everything that To put these speculations into some 2/2/15 would happen to pensions, he did say a few context, let’s travel back to the frontier Provide 2014 IRS Form 1099-R things that ring very true nearly 50 years later. days of pensions, before ERISA. (Distributions from Pensions, Annuities, Bill speculated that Social Security would Retirement or Profit-Sharing Plans, IRAs, The year is 1970. A gallon of gas costs spiral out of control and that if pensions Contracts, etc.) to recipients 39 cents. People are bemoaning the breakup integrated with Social Security, they would of 2014 distributions. of the Beatles and mourning the deaths be diminished. This would lead to the of Jimi Hendrix and Janis Joplin. Internal emergence of savings plans, thrift plans, and 2/14/15 Revenue Code Section 401(k) would not profit-sharing plans as the only viable way exist for another eight years. DB plans exist, For any plan that last provided the triennial to supplement expanding Social Security. benefit statement for the plan year ending but are largely unregulated. 12/31/11, provide the triennial benefit Bill also suggested that funding regulations statement to participants. Opening the time capsule would strangle private pensions. In a statement Wendell Milliman started his Seattle actuarial that seems radical to someone like me, who 3/31/15 firm (which still bears his name today) in 1946. has always known funding rules, he said: As the firm grew and expanded, it established If the 2015 AFTAP is not certified by …Unfunded liability was what permitted an office in San Francisco in 3/31/15, the 2014 AFTAP minus 10 pension plans to be the “Super-savings” 1956, headed by an percentage points is deemed to apply for plans—in other words, by creating large named Bill Halvorson (who purposes of triggering IRC section 436 unfunded liability, both on the date the plan also later established a benefit restrictions beginning 4/1/15 and started as well as at the time of substantial Milliman office in Milwaukee). until a subsequent certification determines improvement in benefits, employers were Bill has long since retired, whether the plan’s funded ratio is sufficient able to make up for their past failure (or but I recently had an to remove the benefit restrictions. inability) to put enough money aside to opportunity to read an pay for currently needed benefits. article he wrote in 1970. Bill Halvorson

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Bill claimed that a healthy unfunded a portion of their liabilities to insurance Are pensions dead? liability was good for pension plans companies) or by allowing retired DB plans are still relevant because they and for participants as well. participants to take their benefits as provide stable and secure retirement lump-sum cash payments. What would the PBGC say (or what income for life. As DC plans have become more popular, we have become more would it have said if it had existed Vine’s paper describes legislative efforts to aware of their inherent risks: the nature of in 1970)? cultivate pension plans, such as enforcing many participants to make bad investment the employee’s right to ascertain and verify Of course, the fundamental flaw with decisions, the fact that most participants their benefits, and providing sponsors the large unfunded liability is that it requires don’t start contributing early enough, and freedom to design plans as they see fit, the pension plan to live forever in order the possibility that retirees may outlive their but states that these efforts are colliding to continue paying benefits. The Studebaker retirement savings. with increased regulation and complexity. pension plan terminated in 1963 and left Yet the paper states that the regulation thousands of employees with substantially DB plans are not dead. Not yet, anyway. of DB plans is not the primary reason for reduced pensions. And, as radical as his And I, for one, hope that the pendulum will the migration from DB to DC plans. ideas seem in today’s environment, Bill swing back toward the stability of some form of DB plan because as life expectancy Halvorson would later go on to become If the plan cultivation provisions were increases, so does the likelihood of outliving president of the Society of in fundamentally flawed, one would expect your savings. The best solution is likely 1977 and the American Academy of to observe migration away from both DB a combination of DB and DC plans in Actuaries in 1982. and DC plans. Nevertheless, during the addition to Social Security. The DC balance period from 1985 to 2011, the number could be designed to provide income for Back to the future of active participants in single-employer a fixed number of years, at which time the Returning to the present day, pension plans DC plans has more than doubled. DB plan (or “longevity plan”) would kick have not died, as Bill Halvorson predicted, During the same period, the percentage in and provide lifetime income at later but they are on life support. A recent of Fortune 100 companies offering new ages, while Social Security would provide paper entitled “Cultivating Pension Plans” hires some form of retirement plan has inflation-adjusted lifetime income. Because by John M. Vine of The Wharton School’s remained constant at 100 percent. Pension Research Council describes the DB benefits would be paid over shorter life The differences between DB and DC simultaneous cultivation and regulation of expectancies, the funding would be much plans, and between traditional pension DB plans and spins the overregulation of less volatile. plans and hybrid plans, suggest that the DB plans as a positive thing—for defined This provides us with the opportunity to do migration away from traditional DB plans contribution (DC) plans. what Bill Halvorson did in 1970. Milliman was attributable primarily to employers’ actuaries are still looking into the future to Just as Bill Halvorson’s article looked 30 desire to avoid volatile and unpredictable develop innovative solutions for our clients. years into the future of DB plans, John Vine’s swings in contribution requirements paper chronicles the last 30 years: and financial accounting expenses, paired with employers’ and employees’ In the past 30 years, very few private preference for plans that allocate benefits sector employers have adopted new David Benbow, CPC, is a client service manager more evenly than do traditional DB plans. DB plans, and many sponsors that had with the Minneapolis office of Milliman. Contact Although concerns about the burdens previously adopted DB plans have now him at [email protected]. imposed by the regulatory provisions of shut them down to one extent or another. the Code and ERISA appear to have Some employers have terminated their influenced employers’ decision-making, DB plans, while others have closed their particularly with respect to the movement DB plans to new entrants. Yet others away from DB plans during the past have frozen accruals under their DB decade, such concerns do not appear plans for some or all participants. Of to have been the primary cause of the late, some DB plans have reduced their migration away from traditional DB plans liabilities (and their assets) by purchasing in general. annuities (and thereby transferring

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2 January 2015