Presentation on theme: "Pension Protection Act of 2006 (PPA) Overview: Sweeping Changes for Defined Benefit Pension Plans Presented by David S. Boomershine, Senior Actuary Boomershine."— Presentation transcript:
Pension Protection Act of 2006 (PPA) Overview: Sweeping Changes for Defined Benefit Pension Plans Presented by David S. Boomershine, Senior Actuary Boomershine Consulting Group, LLC
4 PPA Funding Rules Funding Target Achievement Percentage (FTAP) Funding Target: 100% of Present Value of Accrued Benefits Transition: 92%/ %/ %/ %/2011 -If no Deficit Reduction Contribution in 2007 Use revised required assumption basis Asset Valuation Options allowed: Fair Market Value (FMV) Smoothed investment returns – over 24 months -Smoothed value must be between 90% - 110% of FMV
5 PPA Funding Rules Revised Interest Rate Basis Yield curve: 3 segments 3 segments: 5 years / 15 years / 20+ years Based on 24-month average of quality corporate bonds Alternative: full yield curve Transition: 2008 – 2010 Mortality Tables 2007: Based on RP 2000 table – projected 2008: Prescribed by Secretary of the Treasury -Actual plan-specific experience (if large plan) -Also use projected trends
6 Minimum Required Contributions Adjusted Assets – reduced by Credit Balance Minimum Required Contribution (MRC): Target Normal Cost + Shortfall Amortization Charge -Shortfall: 100% of Funding Target* - Adjusted Asset Value (i.e. Unfunded Actuarial Liability) -Amortize over 7 year period *Note: Transition targets MRC may be reduced by Credit Balance, if FTAP > 80% “At Risk” Plans – FTAP < 80% (transition rules apply): Accelerated funding requirements PPA Funding Rules
7 Credit Balances (CB) 2 Types: -Carryover Balance (COB) – old -Prefunding Balance (PFB) – new 3 Primary Approaches: -Maintain CB, keep future funding flexibility -Use CB, towards Minimum Required Contributions -“Burn” CB, to increase Funded Ratio
8 PPA Funding Rules Maximum Deductible Contributions For 2008: Funding Target (FT) - Assets + Normal Cost + Cushion = 50% of FT, plus “allowance” Concern: Overfunded Plans?
9 Other PPA Issues Benefit Limitations Benefit Distributions PBGC Premiums Disclosure Requirements Hybrid Plans Phased Retirement Combination DB/K Plans Governmental DB Plans Multi Employer DB Plans Non-qualified Deferred Compensation Plans Overfunded Plans/Section 420 Transfers
10 Other PPA Issues Benefit Limitations Funded less than 80% -No benefit increases -Partial restriction on lump sums Funded less than 60% -Frozen benefit accruals -No lump sums -No shutdown benefits Credit Balances must be “burned” to avoid lump sum restrictions - ? No Credit Balance offset required for these determinations - ?
11 Other PPA Issues Benefit Distributions For Lump Sums: For 2008: Revised interest rate basis: 3 segments Phased in 20%/year – by 2012 Mortality table Minimum lump sums Also, must offer 75% Qualified Optional Survivor Annuity PBGC Premiums For 2007: Exemption for Variable Rate Premium due to meeting Full Funding Limitation has been eliminated Variable Rate Premium applies if less than 100% funded Interest rate revised Use Market Value of Assets
12 Other PPA Issues Disclosure Requirements Pension Benefit Statements – Options: -At least once every 3 years: due 2009 plan year -Annual notice that statements are available upon request – due Funding Notice: Replaces Summary Annual Report -Target Attainment Percentage (Funded Status) -Assets -Liabilities -Participant counts -Plan’s funding policy -Asset Allocation -Amendments and material events -Due 120 days after end of Plan Year PBGC Filing required if under 80% funded – with Participant Notice
13 Hybrid Plans (Cash Balance) “New Age” Discrimination Testing Comparison based on: -Annuity -Account Balance -% of pay Some past hybrid design issues resolved prospectively (Whipsaw) Interest credit – not greater than market rate of return Vesting: 3 years of service More viable plan design option now? Other PPA Issues
14 Other PPA Issues Phased Retirement -In-service distributions allowed at age 62 DB/K Plans: In Single Plan may provide for DB and 401(k) benefits – if under 501 participants
15 Additional Note: Financial Accounting Standards No. 158 FASB 2-phase project: revamp standards FAS 158 – Phase 1: -Asset/liability on financial balance sheet now based on Projected Benefit Obligation (PBO) vs. Accumulated Benefit Obligation (ABO) Impact: dramatically increases liabilities on balance sheets No impact on annual Net Expense Generally effective for fiscal years ending after 12/15/2006 Measurement Date must now be last day of fiscal year – effective 12/15/2008