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. Managing A Frozen Pension Plan Should Your Strategy Change? Presented by Heath Merlak, Actuary www.nyhart.com Copyright 2011. All Rights Reserved.
- 2. Heath Merlak Actuary heath.merlak@nyhart.com | (618) 606-4906 Qualifications or certifications:Fellow of the Society of Actuaries, a Fellow of the Conference of Consulting Actuaries, and is an Enrolled Actuary
- 3. Today’s Discussion How did we get here? Frozen Plans Are Still Active Plan Termination Considerations for Frozen Plans Strategies and Steps to Managing a Frozen Pension Plan 3
- 4. Several factors are driving plan sponsors to close or freeze their pension plans Shift from long-term to short-term outlook for determining pension costs Capital markets have been volatile Resulting contribution requirements and balance sheet impacts have been volatile 4
- 5. Frozen Plans Are Still Active Although frozen, all the requirements to manage the plan remain Minimum required contributions ASC 715 expense and disclosure Administration of the plan Most importantly, the majority of the pension risk still remains with the plan sponsor 5
- 7. What’s Our Goal for Our Frozen Pension Plan? Maintain the plan and limit “noise” to our business 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”) Develop strategy to terminate the plan within a stated period of time 7
- 8. Maintain the Plan Plan sponsors may choose to maintain the plan indefinitely for reasons that may include: Belief they can provide benefits at a lower cost than purchasing annuities and manage the associated risks Funding shortfall is too great to consider terminating the plan within the next 5 years Suspect participant data making plan termination too difficult 8
- 9. Steps to consider for maintaining a frozen plan Cost projections and sensitivity testing Determine expected required contributions Assess sensitivity of results to asset performance & interest rates Identify if settlement accounting will apply Assess strategies to lower risk Consider changing asset allocation as plan becomes better funded Add lump sum feature to the plan Review annuity purchase opportunities Administrative and compliance review 9
- 10. Wait & See Plan sponsors may target plan termination but allow the funding rules to naturally get them to fully funded over several years In this situation you will want to reviewsteps outlined on prior page and… 10
- 11. ….in addition, you should Conduct feasibility review Monitor progress more frequently than annually Review of investments Review plan document and participant data Determine strategy for settling obligations Assess strategies to lower risk and ease pain of plan termination Annuity buy-in and buy out Lump sum feature 11
- 12. Develop Strategy to Terminate the Plan Within Specified Timeframe Plan sponsors may target plan termination aggressively setting goals for plan termination In most cases, this will be accomplished through normal contributions plus additional amounts needed to fully fund the plan upon termination 12
- 13. Develop Strategy to Terminate the Plan Within Specified Timeframe The steps outlined previously apply in this situation along with the following: Feasibility review Coordinate with asset advisors Identify short-term implications Get buy-in from senior leadership, Board, etc. Begin thorough participant data review immediately Monitor funded status at least quarterly 13
- 14. Any Questions? This concludes our discussion
- 15. Looking for more benefit presentations? So Where is the Peak? Register for upcoming educational events on pensions, 401(k), healthcare and other actuarial and employee benefits topics at: www.nyhart.com/events/
- 16. ACTUARY & EMPLOYEE BENEFITS 16 Actuaries Consulting In 48 States. 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.
- 18. Defined Benefit & Pension
- 19. Defined Contribution & 401(k)
- 20. Employee Stock Ownership Plan
- 21. Flexible Spending, HRA & HSA
- 22. Healthcare Actuarial ConsultingLearn more at www.nyhart.com
Editor's Notes
- Administration of the plan includes filing forms with the IRS/PBGC, commencing benefits for participants, annual valuations and audits, etc.By freezing the plan, the growth of the risk has been curtailed but the benefits already accrued are unchanged.The funding liability remains unchanged when freezing the plan since this valuation is based on benefits accrued to date.The accounting liability may decrease since this valuation takes into account future pay growth, but the overall liability may only be decreasing by 10% depending on your plan design and demographics.
- In general, plan termination is a complicated process that will likely span 12 months or more. The plan termination will require coordination between HR, finance, actuary, and outside counsel. The PBGC audits most plan terminations (PBGC audits all plans with 300 or more participants) so the participant data preparation can be a significant project.Plan termination timeline will vary by plan and employer - PBGC outlines timing relationships between plan termination steps - IRS Determination Letter filing process adds uncertainty to timelineShortest timeline possible is 60 days - Assumes all notices, forms, etc. filed on day 1 and an IRS Determination Letter is not filedLongest possible timeline is 510 days (ignoring IRS Determination Letter delays)
- Add lump sum feature to the plan to payout benefits on an accelerated but gradual schedule or if the plan already pays lump sums remind terminated participants that lump sums are available.Review annuity purchase opportunities (“buy-in” or “buy out”) to move significant risks (mortality, interest rate, and market risk) to a third party for certain participant groups - Buy-out settles the obligation completely with a third party and the administration is handled by the third party. - Buy-in removes market, interest rate, and mortality risk. Administration of the plan still resides with the plan sponsor.Administrative and compliance review - Do we have the right resources helping us with this plan? - Should we consider outsourcing benefit administration of the plan? - Do we have checks and balances in place to capture regulatory changes?
- Feasibility review – how close are we?Monitor progress more frequently than annually - Market volatility may present an opportunity to settle obligations sooner than anticipated.Determine strategy for settling obligations – purchase annuities and/or payout lump sums. Review of investments - If we had to sell our investments today, does the plan own any investments that are not liquid (i.e., real estate)?
- Feasibility review – how close are we? What is our “magic” number to terminate? Do we want to fund more now to accelerate our timeline? Coordinate with asset advisors – likely will require shift in asset allocationIdentify short-term implications – expected return assumption for accounting purposes, available resources to manage plan termination process
- Feasibility review – how close are we? What is our “magic” number to terminate? Do we want to fund more now to accelerate our timeline? Coordinate with asset advisors – likely will require shift in asset allocationIdentify short-term implications – expected return assumption for accounting purposes, available resources to manage plan termination process
- Because rates are averaged over two years, it will take a couple of years for costs to declinePlans will likely see high requirements drop quickly to zero within a few years of rates increasing
- Areas of Expertise Include: Cash Balance Plan Defined Benefit & Pension Defined Contribution & 401(k) Employee Stock Ownership Plan (ESOP) Flexible Spending, HRA & HSA Healthcare Actuarial ConsultingLearn more at www.nyhart.com
- Areas of Expertise Include: Cash Balance Plan Defined Benefit & Pension Defined Contribution & 401(k) Employee Stock Ownership Plan (ESOP) Flexible Spending, HRA & HSA Healthcare Actuarial ConsultingLearn more at www.nyhart.com