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Late Breaking Pension Developments 2:00 – 3:00 MAAC Meeting – September 13, 2012 Tonya B. Manning, FSA IRS Actuary Employee Plans Jim O’Neill PBGC Actuary.

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Presentation on theme: "Late Breaking Pension Developments 2:00 – 3:00 MAAC Meeting – September 13, 2012 Tonya B. Manning, FSA IRS Actuary Employee Plans Jim O’Neill PBGC Actuary."— Presentation transcript:

1 Late Breaking Pension Developments 2:00 – 3:00 MAAC Meeting – September 13, 2012 Tonya B. Manning, FSA IRS Actuary Employee Plans Jim O’Neill PBGC Actuary Corporate Finance and Restructuring Department (‘CFRD’)

2 Update on Guidance & Review of Notice

3 3 Update on Guidance Final § 430 regulations in clearance Quarterly contributions Proposed § 430 / § 436 regulations have been on hold; will begin working on these again WRERA assets Responses to comments Mergers & spinoffs PRA nd single-employer notice in clearance Delayed effective date plans Benefit restrictions / frozen plan relief

4 4 Update on Guidance Still working on Hybrid Plan regulations Working through difficult issues Regulations described in Notice regarding market rate of return not effective for plan years beginning before (see Notice ) Finalizing Section 417(e) regulations proposed in February 2012

5 5 MAP-21 Key Provisions § 430(h)(2) provides two options for interest rates: Set of three segment rates described in § 430(h)(2)(C)(i), (ii), and (iii), or A full yield curve described in § 430(h)(2)(D)(ii) MAP-21 adds § 430(h)(2)(C)(iv), which establishes a corridor for the segment interest rates The full yield curve is not adjusted for a corridor (more later)

6 6 Segment Rate Corridor Each segment rate described in § 430(h)(2)(C) is adjusted so that it falls within a specified range Range based on an average of the corresponding segment rates for the 25-year period ending on September 30 of the calendar year preceding the first day of that plan year

7 7 Segment Rate Corridor If the plan year begins in Minimum percentage Maximum percentage %110% %115% %120% %125% %130%

8 8 Notice Issued September 11, 2012 Provides guidance on the special rules relating to pension funding stabilization for single-employer defined benefit plans made by MAP-21

9 9 Where do MAP-21 Rates Apply? Calculation of minimum required contribution (MRC) under § 430: Target normal cost and funding target Calculation of the present value of remaining shortfall and waiver amortization installments for purposes of determining any shortfall amortization base for plan year Determination of shortfall and waiver amortization installments, and Limitation on the assumed rate of return for purposes of determining the average value of assets under § 430(g)(3)(B)

10 10 Where do MAP-21 Rates Apply? Applying the benefit restrictions under § 436: Adjusted funding target Adjusted plan assets Resulting adjusted funding target attainment percentage (AFTAP) MRC for plans subject to sections 104 or 105 of PPA ’06 Determined reflecting MAP-21 adjustments to 3 rd segment rate (§ 430(h)(2)(C)(iv))

11 11 Where do MAP-21 Rates NOT Apply? Maximum deductible amount under § 404(o) Minimum present value (including lump sums) under § 417(e)(3) Amount of excess assets that can be transferred to retiree health accounts under § 420 Calculation of FTAP to determine if information must be reported to PBGC under § 4010 of ERISA

12 12 Determination of At-Risk Status The determination of whether a plan is in at-risk status is made separately for purposes for which MAP-21 segment rates do and do not apply Determination based on interest rates used to calculate the funding target for that specific purpose for the preceding plan year Possible result: Plan may be in at-risk status for calculations under 404(o), but Plan may NOT be in at-risk status for determining the MRC

13 13 Annuity Substitution Rule Annuity substitution rule under § 1.430(d)-1(f)(4)(iii) Requires lump sums which are based on § 417(e) minimum present value requirements to generally be valued as the present value of the underlying annuity Underlying annuities are valued using § 430 rates

14 14 Annuity Substitution Rule Although the application of the MAP-21 corridors increases the difference between the § 417(e) interest rates and § 430 segment rates in the short term, the annuity substitution rule for valuing lump sums is unchanged

15 15 How MAP-21 Affects Assets Adjusting contributions receivable discounted using prior year’s effective interest rate If MAP-21 first applies for 2012, then affects assets for Determination of average value of assets (AVA) May be affected MAP-21 due to cap on expected return by the 3 rd segment rate Can affect AVA, even if the funding target is calculated using the full yield curve

16 16 How MAP-21 Affects Assets Option for § 404(o) asset value If 3 rd segment rate (after application of MAP-21 collar) > unadjusted 3 rd segment rate, plan may elect to use § 430 asset value for § 404(o) calculations No similar rule for asset value for § 420 purposes

17 17 Hybrid Plans Hybrid plan regulations regarding market rate of return are not yet final The IRS has not yet decided which rate should apply if currently use segment rates as rate of return: Segment rates ignoring MAP-21, or MAP-21 segment rates (rates after reflecting MAP-21 corridor)

18 18 Hybrid Plans No guidance expected until hybrid plan regulations are finalized Final regulations will not be effective for plan years beginning before January 1, 2014 If final regulations provide that the MAP-21 rates exceed a market rate of return Plan will have to change back to rates ignoring MAP-21 May raise § 411(d)(6) issues

19 19 Section 436 Issues Presumption rules not changed If AFTAP has not yet been certified, just certify with MAP-21 rates (unless elected to delay MAP-21 for § 436 until 2013) If AFTAP already certified before MAP-21, may re-certify: Retroactively to the date of the original certification, or Prospectively, to the earlier of October 1, 2012, or the date of the re-certification

20 20 Section 436 Issues Initial certifications made after 9/30/2012: Are presumed to be done with knowledge of MAP-21 and Notice , and Material change and irrevocability rules apply

21 21 Section 436 Issues Retroactive Application / Recertification Correct distributions back to first certification May reverse credit balance elections that were made by 9/30/2012 if it does not cause an unpaid MRC or unpaid required quarterly contribution § 436 contributions that are no longer needed due to application of MAP-21 are applied to MRC Excess may be added to the prefunding balance

22 22 Section 436 Issues Prospective Application / Recertification Only change operations going forward, beginning with the earlier of date of re-certification or 10/1/2012 For certifications made before 9/30/2012 and re-certified before 12/31/2012, deemed immaterial regardless of plan year

23 23 Section 436 Issues Prospective Application / Recertification If UCEB or plan amendments were not initially allowed, but AFTAP increases later in the plan year so that they are, they must be retroactively allowed May NOT reverse credit balance elections previously made May NOT apply § 436 contributions already made to cover the MRC

24 24 Elections Election to delay effective date to 2013 not required until filing due date (with extensions) of 2012 Form 5500 Same timing requirement for election to change designation of contributions from 2011 to 2012 But, may need to make decisions earlier if Decision would affect operation under § 436, or Need to recertify by 12/31/2012 to use “deemed immaterial” rule Elections to reverse funding balance elections must be made by the end of the plan year

25 25 Election to Change from Full Yield Curve to Segment Rates Plans using the full yield curve do not receive ‘funding relief’ under MAP-21 Such plans, however, may change from the full yield curve to segment rates (and thus, obtain relief under MAP-21) without requiring approval Election must be made for the “first year” MAP-21 applies in order to be eligible for ‘automatic approval’

26 26 Election to Change from Full Yield Curve to Segment Rates Election must be made in writing to the EA and plan administrator by July 5, 2013, regardless of whether 2012 or 2013 is the “first year” MAP-21 applies If election to change to segment rates is made and MAP-21 first applies for § 430 in 2012, but does not apply until 2013 for § 436, then for 2012: Segment rates are used for § 430 The full yield curve is used for § 436

27 27 Transition Issues Application of MAP-21 may retroactively change quarterly contributions Can change contributions originally designated for 2011 plan year that were made in the 2012 plan year to be designated for the 2012 plan year NOTE: This is an exception to the general position of the IRS

28 28 Transition Issues May reverse elections to reduce credit balances as long as this does not Result in new restrictions under § 436, or Result in an unpaid MRC May not change elections already made to USE credit balances

29 29 Strange, but True MAP-21 may actually increase the MRC Happens if the resulting decrease in the funding target causes the plan to be exempt from establishing a shortfall amortization (gain) base

30 30 Other Issues Must recalculate AFTAP for plan years beginning in 2012 unless MAP-21 is deferred to 2013 for § 436

31 Page 31 Late Breaking Pension Developments

32 Page 32 Agenda MAP-21 Changes to PBGC Premiums MAP-21 Changes to PBGC Governance Recent Technical Guidance on MAP-21 Brief Introduction to CFRD and the Role of PBGC Actuaries

33 Page 33 PBGC Premiums No Changes in Flat or Variable Premium Rates for 2012 Flat-rate premiums Increase for 2013 –Single-employer plans - $42 per participant (increased from $35) –Multiemployer plans - $12 per participant (increased from $9) Flat-rate premiums Increase for 2014 –Single-employer plans - $49 per participant –Multiemployer plans – 2013 premium rate indexed for inflation Flat-rate premiums Increased for Increases in National Average Wages (‘NAW’) for 2015 and beyond

34 Page 34 PBGC Premiums Current Variable Rate Premium is $9 per $1,000 of unfunded vested benefits (UVBs). Changes for 2013 and beyond: Indexing –Rate will be indexed similar to how flat-rate premiums are already indexed. –First possible increase due to indexing in VRP is 2013 Variable-rate premiums Increase for 2014 and 2015 –For 2014, the $9 base rate gets 2 years of indexing adjustment and then it is increased by $4. –For 2015, the 2014 rate gets 1 year of indexing adjustment and then it is increased by $5. Maximum VRP is $400 times the # of participants. The $400 rate is also indexed after 2013.

35 Page PBGC Premiums Summary of MAP-21 changes to Single-Employer Premiums (assuming no indexing) Current LawMAP-21 FlatVRPFlatVRP 2012$35$9 per $1,000 UVB$35$9 per $1,000 UVB 2013$35$9 per $1,000 UVB$42 $9 per $1,000 UVB capped at $400 x P- count 2014$35$9 per $1,000 UVB$49 $13 per $1,000 UVB capped at $400 x P- count 2015$35$9 per $1,000 UVB$49 $18 per $1,000 UVB capped at $400 x P- count

36 Page PBGC Premiums Single-employer premium rates assuming 3% increase in NAW: Year Flat-rate PremiumVariable-Rate Premium Rate per Participant Rate per $1,000 of unfunded vested benefits Per participant cap 2012$35$9N/A 2013$42$9$ $49$14$ $50$19$ $52$20$ $54$21$ $55$21$ $57$22$ $59$23$ $60$23$507

37 Page 37 PBGC Governance Changes Specified Board meeting frequency and procedures. Authorizes Board to hire own staff or consultants –National Academy of Public Administration to make recommend Board composition, procedures and policies to enhance Congressional oversight. Gives PBGC inspector general direct access to the Board Clarifies the role of the PBGC General Counsel Establishes a PBGC risk-management officer Sets rules on conflict of interest with respect to the Board and Director Places a maximum five year limit on Director’s term

38 Page 38 PBGC Governance Changes Participant and Plan Sponsor Advocate –Liaison between PBGC, plan sponsors and participants –Must report to Congress annually Independent Peer Review of PBGC single-employer and multiemployer insurance modeling systems –SSA is a possible independent reviewer –Provide written review policies and procedures for all modeling and actuarial work and conduct a record management review. Repeals PBGC’s $100 Million line of credit

39 Page 39 Recent PBGC Guidance PBGC has recently released the following guidance; –PBGC Technical Update 12-1 (Premiums) –PBGC Technical Update 12-2 (4010 filing) PBGC Technical Update 12-1 –MAP-21 Stabilized Rates do not apply to Variable-Rate Premium –Both standard and alternate premium funding target must use the pre-stabilized rates. –Only use at-risk assumptions for premium funding target purposes if plan is at-risk for minimum funding purposes –Assets used for variable-rate premium are market value of assets with prior plan year contributions discounted as done for minimum funding purposes.

40 Page 40 Recent PBGC Guidance PBGC Technical Update 12-2 –MAP-21 Stabilized Rates do not apply for 4010 gateway test per IRS notice However, PBGC has waived reporting requirement in cases where FTAP is greater than 80% if assets used for minimum funding purposes are used in numerator to determine FTAP –Under § (a), reporting triggered by having an FTAP below 80 percent is waived if the aggregate 4010 funding shortfall for the controlled group does not exceed $15 million. This shortfall is determined using same assumptions and asset value as for minimum funding purposes. –Under § (c), a plan is exempt from reporting actuarial information if, among other criteria, it has a 4010 funding shortfall that does not exceed $15 million. This shortfall is also determined using same assumptions and asset value as for minimum funding purposes. –The data to be reported under § (a)(11) are the amounts used to determine the minimum funding requirement for the plan year ending within the information year.

41 Page 41 Introduction to CFRD The Corporate Finance and Restructuring Department (“CFRD”) has two main mission objectives: MITIGATE RISK Promptly identify and monitor risks to the pension insurance program and obtain protection as appropriate MAXIMIZE RECOVERY Maximize recoveries from failed companies for the liability that arises when a pension plan terminates

42 Page 42 Tools for Mitigating Risk CFRD focuses efforts on risk mitigation to obtain protection for pension plans in order to prevent plan terminations We strive to protect the promised benefits to participants (both guaranteed and non-guaranteed) Tools for mitigating risk include: – Early Warning Program – Participant Reductions Due to Cessation of Operations – Statutory Liens for Missed Contributions – Minimum Funding Waivers

43 Page 43 Role of PBGC Actuaries Risk Mitigation –Measurement of PBGC exposure –4062(e) liability estimation –Funding waiver analysis –Negotiations with Plan Sponsor Recovery Maximization –Bankruptcy claim calculations –Statutory Lien calculations –Negotiations with Plan Sponsor


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