Managing a Frozen Pension Plan


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Once benefit accruals are frozen in a pension plan, the game is changed. The indefinite horizon becomes finite. If plan termination is the ultimate goal, the desired horizon is likely five years or less. Should strategic changes be made given this reduced timeframe? Actuary Heath Merlak discusses these pension issues.

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Managing a Frozen Pension Plan

  1. 1. Managing A Frozen Pension Plan<br />Should Your Strategy Change?<br />Presented by Heath Merlak, Actuary<br /><br />Copyright 2011. All Rights Reserved.<br />
  2. 2. Heath Merlak<br />Actuary<br /> | (618) 606-4906<br />Qualifications or certifications:Fellow of the Society of Actuaries, a Fellow of the Conference of Consulting Actuaries, and is an Enrolled Actuary<br /> <br /> <br />
  3. 3. Today’s Discussion<br />How did we get here?<br />Frozen Plans Are Still Active<br />Plan Termination Considerations for Frozen Plans<br />Strategies and Steps to Managing a Frozen Pension Plan<br />3<br />
  4. 4. Several factors are driving plan sponsors to close or freeze their pension plans<br />Shift from long-term to short-term outlook for determining pension costs<br />Capital markets have been volatile<br />Resulting contribution requirements and balance sheet impacts have been volatile <br />4<br />
  5. 5. Frozen Plans Are Still Active<br />Although frozen, all the requirements to manage the plan remain<br />Minimum required contributions <br />ASC 715 expense and disclosure<br />Administration of the plan<br />Most importantly, the majority of the pension risk still remains with the plan sponsor<br />5<br />
  6. 6. Plan Termination Considerations<br />2<br />
  7. 7. What’s Our Goal for Our Frozen Pension Plan?<br />Maintain the plan and limit “noise” to our business<br />Maintain the plan and target plan termination only if required funding and asset performance result in minimal cash outlay to terminate the plan (“Wait & See”)<br />Develop strategy to terminate the plan within a stated period of time <br />7<br />
  8. 8. Maintain the Plan<br />Plan sponsors may choose to maintain the plan indefinitely for reasons that may include:<br />Belief they can provide benefits at a lower cost than purchasing annuities and manage the associated risks<br />Funding shortfall is too great to consider terminating the plan within the next 5 years<br />Suspect participant data making plan termination too difficult<br />8<br />
  9. 9. Steps to consider for maintaining a frozen plan<br />Cost projections and sensitivity testing<br />Determine expected required contributions<br />Assess sensitivity of results to asset performance & interest rates<br />Identify if settlement accounting will apply <br />Assess strategies to lower risk<br />Consider changing asset allocation as plan becomes better funded<br />Add lump sum feature to the plan<br />Review annuity purchase opportunities<br />Administrative and compliance review<br />9<br />
  10. 10. Wait & See<br />Plan sponsors may target plan termination but allow the funding rules to naturally get them to fully funded over several years<br />In this situation you will want to reviewsteps outlined on prior page and…<br />10<br />
  11. 11. ….in addition, you should<br />Conduct feasibility review<br />Monitor progress more frequently than annually<br />Review of investments <br />Review plan document and participant data<br />Determine strategy for settling obligations<br />Assess strategies to lower risk and ease pain of plan termination<br />Annuity buy-in and buy out<br />Lump sum feature <br />11<br />
  12. 12. Develop Strategy to Terminate the Plan Within Specified Timeframe<br />Plan sponsors may target plan termination aggressively setting goals for plan termination <br />In most cases, this will be accomplished through normal contributions plus additional amounts needed to fully fund the plan upon termination <br />12<br />
  13. 13. Develop Strategy to Terminate the Plan Within Specified Timeframe<br />The steps outlined previously apply in this situation along with the following:<br />Feasibility review<br />Coordinate with asset advisors<br />Identify short-term implications<br />Get buy-in from senior leadership, Board, etc.<br />Begin thorough participant data review immediately<br />Monitor funded status at least quarterly<br />13<br />
  14. 14. Any Questions?<br />This concludes our discussion<br />
  15. 15. Looking for more benefit presentations?<br />So Where is the Peak?<br />Register for upcoming educational events on pensions, 401(k), healthcare and other actuarial and employee benefits topics at:<br /><br />
  16. 16. ACTUARY & EMPLOYEE BENEFITS<br />16 Actuaries Consulting In 48 States.<br />Nyhart is one of the nation’s largest independent actuarial and employee benefit firms, consulting to and administering the plans for clients with more than $14 billion in assets. Our team of benefit advisers deliver personalized analysis and recommendations, translating complex calculations and issues into common language that enables corporations, associations, churches and governments to effectively manage their retirement and health care benefits.<br />
  17. 17. ACTUARY & EMPLOYEE BENEFITS<br />Established in 1943, Nyhart is an ESOP with 84 employees and offices in Indianapolis, Chicago, Atlanta and Kansas City. <br />Areas of Expertise Include:<br /><ul><li> Cash Balance Plan
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