The Past, Present and Future State of Corporate and Multiemployer Retirement Plans in the US (with a focus on Defined Benefit Plans)

Transcription

1 The Past, Present and Future State of Corporate and Multiemployer Retirement Plans in the US (with a focus on Defined Benefit Plans) Tim Connor, FSA, EA, MAAA Principal & Consulting Actuary Milliman 1

2 Agenda US Corporate/Multiemployer Retirement Plans The Past Brief history & definitions Trends & influences The Current state Types of Plans Funding & Accounting influences PBGC De-risking Future landscape Risk sharing Hybrid designs Other alternatives 2

3 Plan Types -Corporate Single Employer Traditional Defined Benefit Pay related Flat dollar Defined Contribution Requirements Funding Liabilities pegged to corporate bond rates (with relief) Accounting Complex; Market-consistent Regulatory Nondiscrimination PBGC (guarantee level currently ~$60,000) 3

4 Plan Types -Multiemployer More than one Employer Linked by industry/trade Collectively bargained Administered jointly by union and management Usually Defined Benefit Requirements Funding Actuarial assumptions; CBAs Accounting Simple; like DC Plan Regulatory Withdrawal Liability PBGC (guarantee level currently ~$36/mo. x YOS, or ~ 15,000 +/-) 4

5 The Past what s happened? 5

6 The Past trends 6

7 The Past trends 7

8 The Past trends 8

9 Major Risks Facing DB Plans Today Investment Risk the risk that investment returns differ from expectations Interest Rate Risk the risk inherent when valuations or benefit determinations are tied to variable interest rates Longevity Risk the risk that the plan will experience longer than expected payouts due to increasing life expectancy 9

10 Major Risks Facing DB Plans Today Legislative/Regulatory Risks Impact on contribution timing Impact on accounting treatment Administrative Risks risk in interpreting and administering plan according to its terms (audits, lawsuits, fixes) Other Demographic Risks the risk that demographic experience (retirement, turnover, disability, etc.) will differ from expectations 10

11 Current State of Plans Today: Corporate Plans Volatile contribution requirements Historically low corporate bond rates Significant contributions due at worst economic times Volatile accounting valuations Mark to market Large unrecognized losses Mortality improvements PBGC financial woes Recent premium increases Answer has been De-risking 11

12 Current State of Plans Today: Multiemployer Plans PPA Zone determinations Safe (Green) Critical (Red) Rehabilitation Plan required Industry Activity Workforce declines Bankrupt employers Withdrawal liability limitations Lack of new employers PBGC financial woes Recent premium increases Answer has been Alternative Plan Designs 12

13 How Corporations handle risk Manage it See it as risk/reward Mitigate it Actively attempt to reduce risk Remove it Immunize or Transfer 13

14 Modeling tools Modeling tools help determine if changes are needed by providing a glimpse of what may lie ahead 14

15 Mitigating Risk Liability control Plan features (FAP vs. CAP) Plan design (Hybrids) Asset control LDI, Glide Path Hedging (Tail Risk Management) 15

16 Tail-Risk Management (TRM) What is Tail-Risk? Maintaining equity exposure comes with significant risk/reward Big downside risk protection only costs small upside returns Why Manage It? Reduce overall risk Attempt to eliminate poorest returns Not sacrificing too much upside 16

17 Removing Risk Change Plan design Defined Contribution Variable Annuity Pension Plan Remove risks through investment Full LDI Immunization Remove risks through transactions Annuity purchases/lump Sums 17

18 De-risking actions making news Annuity purchases Lump sums Permanent Temporary ( windows ) To retirees? What have some large companies done? Ford, GM, Verizon 18

19 How Multiemployers handle risks Alternative designs Defined Contribution Variable Annuity Pension Plan Withdrawal Liability changes Plan Mergers and Partitions Multiemployer Pension Reform Act Contribution increases Accrued Benefit reductions 19

20 Multiemployer news MPRA reactions Central States Fund Rescue Plan Latest PBGC projections 50% likelihood of insolvency by % likelihood of insolvency by

21 What does the Future Hold? Alternative Plan Designs a closer look Cash Balance Plan Variable Annuity Pension Plans Pure Stabilized 21

22 Hybrid Plan Designs Accrual patterns can be structured to resemble a Defined Contribution plan [Cash Balance Plan] Accruals can be adjusted to reflect asset performance [Variable Annuity Pension Plan] Technically still DB Plans required to meet DB funding rules 22

23 Key Attributes of a Cash Balance Plan Pay credits can be defined as a fixed percentage of pay Interest credits can be tied to a financial benchmark Employer cost control measures 23

24 Benefits of having a Cash Balance Plan Guaranteed Rate of Return Longevity protection through annuities Accelerated Vesting and benefits portability Cheaper benefits alternative for Employers Ability to mitigate interest rate and market risk 24

25 Key Attributes of a Variable Annuity Pension Plan Benefits self-adjust based on investment returns All participants are affected, including retirees Benefit amounts are not guaranteed, but are lifelong 25

26 Benefits of having a Variable Annuity Plan Sponsor transfers investment risk to participants Participants are guaranteed to not outlive their benefits Compared to DC plan, larger benefits may be borne due to: Longevity pooling Professional asset management 26

27 What does the Future Hold? Can Hybrid designs work? Better risk-sharing between Employers and Participants Would Longevity Plans make sense? Supplement a DC Plan with old age protection Multiemployer Future Proposals Composite Plans 27

28 Future forces? Administrative/Legislative An overfunded DB plan What happens if/when rates increase? Could competition pendulum swing Is DC plan by itself enough Concerns over savings rates, market behavior What if entitlement plan (SS) became DC? 28

29 Wrap up Managing risks Global competition Internal competition Retirement readiness What risks make sense to bear? For the participant For the employer 29