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2006 Enrolled Actuaries Meeting General Session 1: Pension Funding Reform

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Cumulative test: effectively funding standard account with credit balance ... Credit rating of plan sponsor. Credit balances. Amortization period ... – PowerPoint PPT presentation

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Title: 2006 Enrolled Actuaries Meeting General Session 1: Pension Funding Reform


1
2006 Enrolled Actuaries MeetingGeneral Session
1 Pension Funding Reform
  • March 27, 2006

Ethan E. Kra, FSA, EA Chief Actuary-Retirement Mer
cer Human Resource Consulting
2
Agenda
  • The Problem
  • How we got where we are
  • The issues today
  • Credit Balances

3
The Problem
  • Large and growing PBGC deficit
  • Employees suffering benefit cutbacks in distress
    terminations
  • Volatile contribution requirements
  • Employers freezing plans and shiftingto all-DC
    approach

4
How We Got Where We Are
  • Pre-ERISA
  • Normal cost plus interest on unfunded liability
  • Cumulative test effectively funding standard
    account with credit balance
  • Never required any funding of the unfunded
    liability principal
  • Competing interests the squeeze between tax
    expenditures vs. participant security

5
How We Got Where We Are
  • ERISA
  • Long term funding
  • 30 to 40 years to pay off mortgage
  • Typical interest rates
  • 1976 4½-6
  • 1980 5-8
  • Below long term bond rates
  • 1990 5-11
  • Typically in excess of long term bond rates
  • Anticipated equity risk premium
  • Sticky assumptions
  • Changing asset mix

6
How We Got Where We Are
  • OBRA 87
  • Introduction of the double-barreled approach
  • Greater of
  • Long term funding requirement
  • Solvency requirement
  • Solvency test
  • Four-year smoothing on interest rates
  • Up to five-year smoothing on assets
  • Reversion tax
  • Elimination of long-term funding policy
  • All followed by Perfect Storm

7
The Issues Today
  • All proposals under consideration
  • Solvency test only
  • A single barreled approach, but using only the
    second barrel
  • Asset smoothing
  • Interest rate smoothing
  • Yield curve
  • Credit rating of plan sponsor
  • Credit balances
  • Amortization period
  • Actuarial losses or actuarial gains/losses
  • Mortality tables one size fits all?
  • Benefit limitations
  • Phase-in period
  • Reversions and use of super surplus

8
Credit Balances
  • Were credit balances the problem
  • or
  • Were the detailed rules the problem?
  • What caused all of the high profile plan
    terminations of severely underfunded plans that
    did not receive contributions for a number of
    years?
  • Administration Response Eliminate credit
    balance accelerate full funding
  • Rename Credit Balance Prepaid Pension
    Contribution Account

9
Credit Balances Issues
  • Double counting of credit balances on 90 full
    funding override
  • Grows with interest while trust fund loses money
  • Conflicting regulatory guidance for overfunded
    plans with credit balances
  • Should credit balance grow with interest or be
    utilized to the extent plan would be underfunded
    absent the credit balance?
  • Many plans never set up bases
  • Credit balance utilized to avoid restriction on
    plan improvements same dollars utilized to
    satisfy next years contribution
  • Interest credit on phantom assets contributions
    deposited within 8½ months of year end deemed
    deposited at year end

10
Credit Balances Fundamental Premises
  • No plan sponsor should be required to contribute
    extra because they contributed early
  • No plan should be worse off because it received
    an early contribution
  • Need ability to burn credit balances to meet
    thresholds

11
Conference Committee
Final Bill
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