Speakers: - Vincent F Spina, ASA, EA, MAAA, President, BPAS Actuarial & Pension Services, and & Recordkeeping Services - Maryann Geary CPC, ERPA, Executive Vice President, BPAS Plan Administration

1. B P A S P A R T N E R C O N F E R E N C E 2 0 1 6
Defined Benefit Plans – Legislative Update,
Trends and Opportunities
Vincent F. Spina
CPC, ERPA, Executive Vice President, BPAS Plan Administration
B P A S P A R T N E R C O N F E R E N C E 2 0 1 6
Maryann Geary
ASA, EA, MAAA, President, BPAS Actuarial & Pension Services, and & Recordkeeping Services

2. Agenda
2016 BPAS Partner Conference
• Legislative Update for Defined Benefit Plan
Sponsors
• “Borrow, Fund & Immunize” Strategy
• Long-term Trends

3. 2016 BPAS Partner Conference
On November 2, 2015, the President signed into law a two-
year bipartisan budget deal that contains provisions relevant
to sponsors of defined benefit pension plans. These
provisions include:
• PBGC Premium Increases
• Segment Rate Stabilization Extension
Legislative Update
Bipartisan Budget Act of 2015 (“BBA”)

4. 2016 BPAS Partner Conference
PBGC Premium Increases: The BBA calls for increases to both the flat-rate
and variable-rate premium starting in 2017.
Plan Year Flat-Rate Premium Variable-Rate Premium(1)
2015 $57 2.4%
2016 $64 3.0%
2017 $69 3.3% + inflation
2018 $74 3.7% + inflation
2019 $80 + inflation 4.1% + inflation
(1) If using the alternative method, cannot utilize the interest rate stabilization provisions to determine the unfunded vested benefits.
Flat-Rate Premium = Per participant charge.
Variable-Rate Premium = Percentage charge for unfunded vested benefits.
Legislative Update
Bipartisan Budget Act of 2015 (“BBA”)

5. 2016 BPAS Partner Conference
Segment Rate Stabilization Extension
• Under the Moving Ahead for Progress in the 21st Century Act
(MAP-21), interest rates used to determine the Funding Target
Liability must be within a certain range of the 25-year average of
interest rates.
• The Highway and Transportation Funding Act of 2014 (HATFA)
extended the 10% corridor established by MAP-21 in 2012 through
2017. The BBA further extended the 10% corridor through 2020.
The corridor will phase-out to 30% between 2021 and 2024.
Legislative Update
Bipartisan Budget Act of 2015 (“BBA”)

6. 2016 BPAS Partner Conference
Segment Rate Stabilization Extension
It is important to note that the segment rate stabilization only
impacts the calculation of the Plan’s minimum required contribution
and the Adjusted Funding Target Attainment Percentage (AFTAP).
– Does not impact the calculation of:
• Financial accounting results under ASC 715-30
• PBGC variable rate premium
• Termination cost
• Lump sum calculations
Legislative Update
Bipartisan Budget Act of 2015 (“BBA”)

7. This chart assumes interest rates remain level from May 31, 2016 into the future.
2016 BPAS Partner Conference 7
4.46%
4.29%
4.38% 4.37% 4.37% 4.37% 4.37% 4.37% 4.37% 4.37%
6.37%
6.18%
6.00%
5.49%
5.03%
4.61%
4.37%
5.81%
5.65%
5.52%
5.09%
4.67%
4.41%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Plan Year Beginning January 1,
Projected Effective Interest Rate
Without MAP-21/HATFA With MAP-21/HATFA With BBA
Legislative Update
Bipartisan Budget Act of 2015 (“BBA”)

8. 2016 BPAS Partner Conference
• PBGC variable rate premium is 3% of Plan’s
underfunded in 2016, increasing to 4.1% by 2019
– Sponsor only receives “coverage” for this premium
– PBGC is making the statement: “we don’t want to be
your bank”
One Approach to Underfunded Issues:
Borrow, Fund & Immunize

9. 2016 BPAS Partner Conference
Many sponsors with good credit are considering a strategy of
borrow, fund & immunize.
• A Sponsor borrows from a bank the amount of PBGC
underfunding and contributes it to the plan.
– Borrowing rates may be very similar to that of PBGC variable rate premium, so
interest costs may be offset completely by reduction in PBGC premiums.
– Any amount that the contribution earns on the deposit while in the plan’s trust is in
essence “arbitrage.”
– If a client is a tax-paying entity, they receive the value of the deduction in the year
deposited: in essence the government “subsidizes the loan.”
– Immunization of the portfolio at the time of deposit is a de-risking strategy.
One Approach to Underfunded Issues:
Borrow, Fund & Immunize

10. 2016 BPAS Partner Conference
Under
Relief
w/o
Relief
Effective Interest Rate 6.32% 4.10%
Plan Assets $ 20,558,936 $ 20,558,936
Target Liability $ 18,990,676 $ 25,027,411
Over/(Under) Funding $ 1,568,260 $ (4,468,475)
Funded Percentage 108.3% 82.1%
One Plan’s Impact of Funding Relief

11. 2016 BPAS Partner Conference
• Immunization Strategy
– Looking at projected annual benefit payments from a plan and constructing a
portfolio of high-quality corporate bonds whose dividends and maturity values
“match-up” to the payment stream.
– Immunization is meant to eliminate interest rate risk.
– Some portfolio managers use derivatives to provide duration. Buyer beware!
– How much lower can 30-year Treasury rates go?
• United State 30-Year Treasury yields are currently around 2.6%.
• German (i.e. 0.90%) and Japanese (i.e. 0.35%) rates are significantly lower!
• Our clients who have done this have replaced volatile pension expense
with predictable loan payments.
One Approach to Underfunded Issues:
Borrow, Fund & Immunize

12. 2016 BPAS Partner Conference
From 2015 Trustees Report (Social Security and Medicare): https://www.ssa.gov/oact/trsum/
Social Security and Medicare:
The Projected Cost “Blow-up”

13. 2016 BPAS Partner Conference
Longer-term fixes will require one or combination of:
• Benefit cuts (increase retirement age, adjust COLA or
actual cut in benefit itself)
– Whose benefits get cut?
• Tax increase
– Who do we tax more?
• Cut the Defense Budget
– Whose jobs get cut?
• Run larger deficits
– What we’ve been doing!
Social Security and Medicare Funding Issues

14. 2016 BPAS Partner Conference
Median Household Income

15. 2016 BPAS Partner Conference
Reduction in number of children…and…
Social Security was “Fixed” in 1983…
So Why is this Happening?

16. 2016 BPAS Partner Conference
…dramatic improvements in life expectancy…at birth…
Why is this Happening?

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…and at age 65…while….
Why is this Happening?

18. 2016 BPAS Partner Conference
…% of those age 16 to 65 working has declined leading to…
Why is this Happening?

19. 2016 BPAS Partner Conference
…reduction in Worker to Retiree ratio…projected to decrease to 2.0 in 2030.
Why is this Happening?

20. 2016 BPAS Partner Conference
Pensions have morphed into 401(k) plans…which are just pre-tax
savings plans…putting retiree in “charge” of two legs of the stool.
Retirement Income
Pensions
Social
Security
Personal
Savings
A Wobbly Three-Legged Stool

21. 2016 BPAS Partner Conference
Decline in 30-Year Treasury Yields
have led to...

22. 2016 BPAS Partner Conference
$420,000
$760,000
$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
Cost of Annuity Providing $50,000 a Year for Life to 65
Year Old Male
1985
2016
Significant Increase in Cost of
Guaranteed Income

23. 2016 BPAS Partner Conference
• Employees are going to want to work longer.
– For a married couple who are both age 65 and in good health, it’s 50-50
that one or both live until age 92!!
• If they want to retire comfortably, they almost certainly are going to
have to save more than they have been.
– Leading to explosive growth in Cash Balance Plans
• They are going to need a lot of help planning for
retirement…whenever that is.
• How do employers navigate their fiduciary responsibilities in this
environment?
Implications for Employers

24. 2016 BPAS Partner Conference
Germany 30-Year Treasury Rate

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Japan 30-Year Treasury Rate

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Q&A

27. 2016 BPAS Partner Conference
Vincent F. Spina, ASA, EA
President
BPAS Actuarial & Pension Services
(315) 703-8999
vspina@bpas.com
Contact Information

28. B P A S P A R T N E R C O N F E R E N C E 2 0 1 6
BPAS PARTNER CONFERENCE 2016
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