1 Pension Risk Management Utilities Sector Tim Geddes, FSA, EA, MAAA Director, Deloitte Consulting LLP
2 Agenda Introduction Pension Risk Overview Pension Risk in the Utility Sector Balancing Value and Risk De-risking Framework and Strategies De-risking Impact on Expense Roadmap to Plan Termination Latest Developments 2 Copyright 2014 Deloitte Development LLC. All rights reserved.
3 Introduction Timothy J. Geddes, FCA, FSA, EA, MAAA Tim is a Director with Deloitte Consulting s Human Capital practice in Detroit, having been with Deloitte for nearly sixteen years. During that time, he has served as the lead actuary to a number of Deloitte s actuarial clients and reviewed employee benefit disclosure information for a number of the firm s attest clients. Tim has provided employee benefits expertise to private and public sector employers and has assisted with a number of employee benefit-related litigation support engagements. Tim is a member of the American Academy of Actuaries Pension Committee and the Society of Actuaries Retirement Plan Experience Committee. 3 Copyright 2014 Deloitte Development LLC. All rights reserved.
4 Pension Risk Overview
5 Pension Risk Overview Many companies, across all sectors, face risks inherent in their retirement programs. Some risks impact companies differently or are uniquely specific to the utilities sector Strategic Risk Alignment with talent objectives Mix of defined contribution/defined benefit Integration of funding & investment policies Employee appreciation (ROI) Focusing on critical workforce segments Financial Risk Volatility of results Assumptions and methods Adopting the right risk mitigation strategies Impact on free cash flow, earnings per share Cost effectiveness Mismatch between rate recovery and funding requirements Operational Risk Governance Effective decision making Insourcing vs. outsourcing Oversight of third party providers Using external experts appropriately Legislative/Oversight Risk Accounting standard compliance Fulfilling fiduciary responsibilities Financial reporting compliance Local compliance (e.g. ERISA) Continuously changing pension legislation Evolving financial reporting standards 5 Copyright 2014 Deloitte Development LLC. All rights reserved.
6 A Rough Road for Retirement Plans Legal and financial shocks over the past decades have dramatically increased retirement cost and volatility, which in turn has driven reactive strategy and stop gap measures. Legal and Financial Shocks ERISA enacted Oil shock and high inflation Equity market boom TRA86 and OBRA87 FAS 87 and 88 adopted 401(k) introduced Equity boom continues after early 90 s slump RPA 94 FAS 106 adopted Double digit medical trend Bookend market crashes Sarbanes-Oxley FAS 158 moves to market valuation PPA 2006 Bond yields decline and more volatile Financial market volatility IFRS convergence Piecemeal U.S. funding reform adds volatility Heightened fiduciary scrutiny 1970s 1980s 1990s 2000s Strategic and Operational Reaction Paternalism reigns Plan simplicity Investment conservatism Asset diversification Rise of the 401(k) M&A raiding of pension surplus Plan terminations Heavy equity focus Move to hybrid DB plans (CB, PEP) Retiree medical redesign/closure Contribution holidays 401(k) explosion Admin outsourcing increases DB plans closed and frozen Asset volatility drives ALM and LDI Retiree medical sponsorship declines steeply 401(k) accounts battered Continued DB and retiree medical closure/freeze 401(k) match cessation Need for delayed or phased retirement Hedging equity and mortality risk 401(k) fee disclosures Cost, risk, complexity increased while employee value has declined 6 Copyright 2014 Deloitte Development LLC. All rights reserved.
7 Pension Risk in the Utility Sector
8 Pension Risk in Power and Utilities Sector Latest Developments For Pension Plan Sponsors in the Sector Risks of maintaining and funding pension benefits are expected to rise in the industry Continued economic and market volatility Many underfunded pension plans with high pension obligations due to large actuarial losses Highly unionized workforces Growth in de-regulated business makes pension risks increasingly a company rather than customer responsibility Pension costs are managed by rate structures approved by various public commissions. In recent years, the utility commissions have been less forthcoming with rate increases and organizations have faced increased scrutiny when making these requests Utilities are concerned that pension contribution requirements will increase before the appropriate changes to the rate structure could be approved and enacted. For a number of P&U companies, the pension/opeb obligation is becoming a larger portion of their balance sheet With recent consolidation, many utilities have acquired additional legacy obligations that need to be managed Power and utilities plan sponsors who consider and adopt active strategies to manage their pension risk will help their companies gain an advantage from both a financial stability and an acquisition/retention viewpoint Long-term pension funding law (PPA 2006 before the MAP-21/HATFA relief provisions) does not recognize asset return expectations above the corporate bond yield. As a result, on the long-term utilities may be required to fund more than the amount they recover in terms of pension expense. 8 Copyright 2014 Deloitte Development LLC. All rights reserved.
9 Pension Risk in Power and Utilities Sector Many utilities have large pension obligations relative to market cap, which increases the volatility the pension plan can have on financial performance and EPS 100% Power and Utilities 90% Size of Pension Plan Relative to Organization (Ratio of Pension Liability to Market Cap 80% PG&E Corporation FirstEnergy Corp. 70% 60% Exelon Corporation 50% Entergy Corporation Pinnacle West Capital Corporation Ameren Corporation Pepco Holdings, Inc. 40% DTE Energy Company Integrys Energy Group, Inc. 30% Edison International Northeast Utilities Southern Company PPL Corporation PSEG Inc Centerpoint Energy, Inc. 20% American Electric Power Company Great Plains Energy Inc. Xcel Energy Inc. NiSource Inc. Sempra Energy Wisconsin Energy Corp AGL Resources Inc. 10% Duke Energy Corp NRG Energy, Inc. AES Corporation Oneok, Inc. Dominion Resources, Inc. 0% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% Funded Status Pension Plan (Assets / Liabilities) Information used to determine Pension Liability as a % of Market Cap information is as of 1/1/2014 Year-end information is as of 12/31/2013 (or based on most recently available 10-k) US Plans only 9 Copyright 2014 Deloitte Development LLC. All rights reserved.
10 Balancing Value and Risk
11 Retirement Strategy Balance of Value, Cost, and Risk The appropriate path forward will vary by employer, but must be driven by analyzing the return on investment (ROI) generated by retirement plan expenditures. This is not an easy task, but a thoughtful review of the value, cost, and risk of the plans will help companies determine the optimal way retirement plans fit into a company s talent strategy. Retirement ROI = Value Risk Adjusted Total Cost Value Cost + Risk Can be measured in many ways, but must ultimately be linked back to the broader rewards and business strategy. Typical measures of value include: Productivity Employee recruitment, retention and engagement Employee benefit survey results Opportunity Cost Does the company get appropriate value for the cost and risk? Relative Value Would rewards dollars be better spent elsewhere? Must reflect the total cost of sponsorship, adjusted for risk. Total cost includes the cost of benefits plus all hard and soft costs associated with the plans. Risk increases total cost directly through higher management costs, but also has significant indirect costs that must be considered. 11 Copyright 2014 Deloitte Development LLC. All rights reserved.
12 Measuring Cost and Risk The cost of the actual benefits are just one portion of the total cost of sponsorship for retirement plans. There are numerous hard and soft costs that must be understood, and the total cost must reflect the broad and significant areas of risks posed by retirement plans. Total Cost of Sponsorship Hard Costs Soft Costs Risk Cost of Benefits Normal cost Unpaid Past Costs Amortization of unfunded amount Vendor Fees Actuary Attorney Investment management Trustee Administrator Plan Auditor Other Costs Internal headcount (HR, IT, Finance, Treasury, etc.) PBGC premiums Internal systems Cost of Complexity Executive/management time Loss of strategic alignment Reactive redesign Financial statement surprises Quarterly close timing Loss of Productivity Internal meetings Unappreciated rewards Employee uncertainty Strategic Risk Lack of strategic alignment Workforce planning Financial Risk Cash and expense volatility Asset and liability mismatch Financial reporting Operational Risk Governance Reputational risk Internal controls Regulatory Risk Ongoing regulatory changes Fiduciary risk 12 Copyright 2014 Deloitte Development LLC. All rights reserved.
13 De-risking Framework and Strategies
14 De-Risking Framework Given the current environment, many plan sponsors are evaluating additional measures to manage and lower the liabilities carried for and financial risks inherent in pension and post retirement health and welfare (H&W) plans. These strategies are primarily focused in three areas: Plan Design Funding and Investment Policy Liability Management Pension Reduce or eliminate future benefit accruals Shift from defined benefit focus to defined contribution focus Close plan to new entrants Offer hybrid plan design Change plan provisions to encourage retention and reduce volatility Implement liability driven investment (LDI) strategy Continue reducing equity price risk by reducing exposure to equities Reduce interest rate risk (asset liability mismatch), through long bond funds or synthetics Immunization or duration matching strategies Risk transfer partial liability settlement through purchase of annuities from insurance company (small annuity buyouts) Risk settlement settle terminated vested liability by amending plan to allow lump-sums Risk Control -- Offer lump sums to actives upon termination Risk settlement settle retiree liability by amending plan to allow lump-sums Post Retirement H&W Eliminate certain types of coverage under the plan e.g. dependent or post-65 drugs Shift cost to retirees by increasing retiree contributions, capping employer subsidy or plan design changes Examine alternative options that shift costs to CMS or the pharmaceutical companies Change to an account balance approach to provide the benefits Pre-fund obligations to decrease expense and reduce risk Use of captives or other vehicles to pre-fund entire liability Risk settlement retiree healthcare buyouts Move from group plans to Individual policies which are generally less expensive and savings are shared with retirees. Administer through use of Medicare coordinator There is no silver bullet in any of the proposed approaches. They are all based on the same financial principles and ultimately must reflect the risk/return goals of the plan sponsor. 14 Copyright 2014 Deloitte Development LLC. All rights reserved.
15 Financial Balance Sheet Risk Spectrum Lower Equity, Lengthen Bond Duration Traditional Asset Allocation/More Equity Exposure LDI Terminate Plans Annuity Buy In Risk (and reward) is in terms of net balance sheet position, not pure asset return. High risk in this context means there is a higher probably that the funded status of the plan will change differently than expected. This can move both to the black or to the red. Removing risk has its costs less likely to make up funding and accounting shortfalls through the markets. 15 Copyright 2014 Deloitte Development LLC. All rights reserved.
16 Executing a Successful Pension De-Risking Strategy Current State Assessment Understand current financial costs Identify risk tolerance and current risk profile Evaluate risk factors and impact on business Develop De-Risking Strategy Explore plan design solutions Explore investment policy solutions Explore liability settlement solutions Develop De-Risking Roadmap Determine key actions Determine trigger points Draft roadmap for stakeholder approval Implement Form cross-functional execution team Implement one or more de-risking solutions Ongoing Risk Monitoring Monitor financial status Consider innovations in solutions / changing economic circumstances 16 Copyright 2014 Deloitte Development LLC. All rights reserved.
17 Investment Policy Asset and Liability Interaction Considerations Typical pension portfolios consist of both hedging assets (e.g. fixed income) and return generating assets (e.g. equities and alternatives). Many plan sponsors are performing analysis to understand how hedging assets can mitigate asset/liability risk. Assets and liabilities are interrelated, and plan sponsors are shifting their views of pension risk from investment return (asset only) volatility to surplus (funded status) volatility. This volatility drives a large part of the underlying variability in the annual cash contribution requirements and accounting results for the plan. In recent years, more sponsors have adopted a liability driven investing ( LDI ) strategy, whereby the sponsor takes into account the liability profile of the plan when making investment decisions. This typically entails better aligning the duration of the plan s assets to that of the plan s liabilities. 17 Copyright 2014 Deloitte Development LLC. All rights reserved.
18 Pension Refinancing Strategy Issuing debt enables employers to increase plan contributions with limited impact on free cash flow through tax deductions. Corporation Cash Flows Cash Inflow Cash Outflow Cash Neutral Analysis of Impact Plan Participants Participants may have more options because of the lump sum offer. Retirees continue to receive annuities (or potentially a lump-sum settlement) Non-retired participants get option to receive lump-sums to settle obligation Employers Improved financial metrics upon refinancing the plan: Fully funding the plan through increased contributions eliminates pension deficit and enables risk transfer Debt/Equity ratio decreases which provides employer with greater access to capital at lower cost Significant volatility eliminated Offers acceleration of tax deductions 18 Copyright 2014 Deloitte Development LLC. All rights reserved.
19 Pension Liability Management Options The two techniques are not mutually exclusive. In a termination, a lump-sum cash out and an insured annuity purchase would both occur. Cashout (Actives*, Term Vested, Retirees) Description Provides some subset of current or former employees with the option to receive a lump-sum payment Removes liabilities and risk through lump-sum payment Actives can only get lump sum upon plan termination Advantages Favorable lump sum interest rates result in lower liability than annuity purchase Reduces long-term administrative issues/costs and overall plan risk Avoids pending mortality table changes Considerations Must be > 80% funded to execute (IRS funding basis) May require accelerated cash funding May trigger settlement accounting depending on election rates (~$3.5M charge at 12/31/2014 assuming 50% terminated vesteds elect lump sum) IRS may prohibit retiree cash out (awaiting guidance) Communication is very important to allow participants to make informed decision Annuity Buy-Out/Full Termination Annuity provider takes over payments to participants Completely removes liabilities from company financials Pension plan liability and administration shifted to annuity provider Full transfer of risk to insurer Higher cost than lump sums Settlement accounting will be triggered (~$28.2M at 12/31/2014 under baseline scenario) * Active cashout is only an option if terminating the plan in full 19 Copyright 2014 Deloitte Development LLC. All rights reserved.
20 Pension Liability Management Options Understanding the impact on plan participants and plan sponsors is an important diligence step Impact on Participants Cashout (Actives, Term Vested, Retirees) Participants now have full control of retirement assets Depending on actual investment return and how long they live, participants could be better or worse off with the lump sum vs. the annuity Participants prefer to have the option of a lump sum, as it is completely voluntary, but offers flexibility if needed Participants could face tax penalties if they are under 59 ½ and do not roll over the money to another qualified plan. Good communication is key to avoid this Annuity Buy-Out/Full Termination Participants liability will be backed by a very highly rated insurer, which they should prefer Participants will lose PBGC coverage, but gain coverage through the state insurance associations, which varies by state For participants with significant amount of liability, the coverage from the PBGC could be better than coverage from the state associations Impact on Plan Sponsor Term Vested: Appears to be good option in all plans to decrease plan administrative and PBGC costs Actives: Adding lump sum option for actives to be considered depending on plan design and termination timeline, but has minimal short term impact Retirees: Some employers have sent a Private Letter Ruling to IRS to approve lump-sum offerings for retirees. The strategy could potentially be less expensive than purchasing annuities, however plan sponsors should enter cautiously due to concern of anti-selection (less healthy retirees electing the lump sum) Could require cash out-lay Plan termination is a lengthy process, but is only option to completely eliminate pension risk 20 Copyright 2014 Deloitte Development LLC. All rights reserved.
21 Cost to Terminate versus Maintain Retiree Liabilities While many believe the cost of a pension buyout to be very high, a significant portion of the cost difference is attributable to future costs an ongoing plan will bear but that are hidden from the required liability measure. Annuity Buyout Cost* 5-8% 110% - 115% 0% 4% 113% Percentage of US GAAP Liability 100% 0% 1% 1% 2% 2% 2.4% 1% 2% Future costs that will be borne by plan sponsor if frozen plan is maintained. US GAAP Liability Admin Expenses PBGC Premiums Investment Management Credit Default/ Downgrade Mortality Economic Liability Difference Annuity Buyout Liability Assumptions: Admin Expenses: PBGC Premiums: Investment Management Fees: Credit Default/Downgrade Risk: Mortality Cost: Estimated at $40/participant per year PBGC premiums are $42 per person in 2013, $49 in 2014, $57 in 215, $67 in 2016 and indexed to inflation thereafter Estimated at 25 basis points annually Even under an LDI strategy, sponsors will have ongoing costs within the bond portfolio related to credit defaults and downgrades. Estimated at 24 basis points annually Estimated cost of moving mortality basis from PPA prescribed mortality table using Scale AA to the RP 2014 generational table using scale MP * The percentages shown are estimates, actual percentages will vary depending on plan, demographics, or current situation Source: Prudential Insurance Company 21 Copyright 2014 Deloitte Development LLC. All rights reserved.
22 De-risking Impact on Expense
23 Pension Accounting Overview Components of Net Benefits Cost (FASB: ASC 715) An entity recognizes the Net Periodic Benefit Cost as expense or income for the year. The Net Periodic Benefit Cost is the sum of components (1) through (6) below. Component Sample Description (1) Service Cost $80 Value of Benefits Earned this Year (2) Interest Cost* 100 Interest on PBO (3) Expected Return on Assets* (140) Expected Earnings on Assets (4) Amortization of Past Service Cost* 40 Recognition of Plan Improvements (5) Amortization of (Gain)/Loss* 20 Recognition of Differences in Experience (6) Curtailments/Settlements* 15 Non-recurring special charges/(credits) (7) Net Periodic Benefit Cost $115 Total Expense for Post-employment Plan * IAS 19 (Revised 2011) modifies the derivation of the Net Periodic Benefit Cost. The revision utilizes a net interest approach thereby eliminating the use of expected return. Past Service Costs are recognized in the P&L immediately. Actuarial Gains/Losses are recognized immediately in OCI. This could have a significant impact on pension expense if FASB took steps to align US GAAP with IFRS. 23 Copyright 2014 Deloitte Development LLC. All rights reserved.
24 Pension Accounting Overview Balance Sheet Presentation The following shows the presentation of the balance sheet liability under IAS 19 for a sponsor of a defined benefit plan. Component Sample Description (1) Defined Benefit Obligation (DBO) $2,000 Actuarial Present Value of Liability (2) Fair Value of Assets (FVA) (1,500) Value of Dedicated Assets (3) Unfunded Status $500 (4) Unrecognized Past Service Cost* (200) Value of Plan Improvements (5) Unrecognized Actuarial gains/(losses)* (400) Experience different from assumed (6) Net Recognized Amount* ($100) Balance Sheet Liability * The IASB has made changes to IAS 19 ( IAS 19 (Revised 2011) ) which will affect the determination of these components. These changes were generally effective for years beginning January 1, 2013 and later, although early adoption was permitted. The revision will immediately recognize past service costs (in P&L) and actuarial gains/losses (in OCI). 24 Copyright 2014 Deloitte Development LLC. All rights reserved.
25 Pension Accounting Overview Pension and OPEB Ratemaking Practices Ratemaking practice is to generally forecast expenses based on historic or future test period costs, and to recover the forecasted expenses in base rates. Because pension/opeb expenses change annually, utilities do not always recover the amount of costs they actually incurred as they are recorded in their accounts. Several rate design options are available for recovering expenses associated with pension and OPEB costs that utilities incur after rates are set Deferral account Most common type of mechanism Recognized costs that were missed and defers to next rate case Costs are amortized and recovered in rates Cost trackers Adjustments to rates that have been pre-approved by regulators Changes are tracked and flowed to customers as they occur Rate stabilization Update rates with use of a true-up mechanism for all expense items, including pension/opeb 25 Copyright 2014 Deloitte Development LLC. All rights reserved.
26 Pension Accounting Overview Settlement accounting is an issue for some utilities, as rate agreements often to not allow for the recovery of costs incurred due to settlement accounting treatment. Due to adverse capital market experiences over the past decade, most plans have large unrecognized actuarial losses currently sitting in AOCI. Certain actions could trigger a settlement, which could require those losses to be recognized in earnings under US GAAP. Settlement Triggers A settlement is a transaction that meets the following 3 criteria Irrevocable action, cannot be revoked, recalled, or undone Relieves the employer or plan of primary responsibility for providing benefits to participants Eliminates significant risks related to the benefit obligation and assets Settlement accounting is triggered when the settlement amounts that have accumulated through the year are greater than the sum of the service cost and interest cost 2 common examples of a settlement Insurance company unconditionally takes on obligation to provide benefits to retirees Participants are paid a lump-sum distribution (either through one-time offering or aggregate payments during year) For utilities, settlements are often triggered by lump-sum payments to participants The percentage of AOCI that must be recognized is equal to the percentage of liability settled 26 Copyright 2014 Deloitte Development LLC. All rights reserved.
27 Impact of De-risking Strategies on Pension Expense Risk management strategies tend to increase near-term expense under a baseline scenario in exchange for potentially reduced expense if negative interest rate/equity scenarios come to pass. In the utility sector, the impact on expense is often passed on to customers through rate agreements. Measuring the impact that pension risk management strategies have on expense depends on many factors, including the funded status of the plan, the amount of unrecognized losses, and the current investment policy of the plan. Baseline Scenarios Declining Interest Rate Scenario LDI Strategy Volatility Expense Liability gains/losses will be offset by asset gains/losses Lower future asset returns Assets and liabilities increase as discount rates fall Expense may be lower under LDI than current asset allocation Strategy Volatility Lower asset/liability that is other subject to market volatility Smaller liability increase (loss) due to smaller plan liability TV Cash-out/ Annuity Purchase Expense Settlement Accounting Future asset returns for plans with aggressive investment portfolio Expense may be lower than under baseline if rate declines offset lost assumed return The advantage of de-risking is predictability and down-side protection 27 Copyright 2014 Deloitte Development LLC. All rights reserved.
28 Roadmap to Plan Termination
29 Pension De-Risking Sample Roadmap De-risking a plan is a staged process with trigger points that reflect your business strategy and prevailing market conditions. Sample 29 Copyright 2014 Deloitte Development LLC. All rights reserved. 29
30 Key Questions for Various De-risking Steps Trigger Points Base it on Accounting, Funding, or Termination measures? Frequency of measures What criteria to set individual triggers? Is there a target timeframe? Trigger Steps At each step, what is the best approach - liability change, asset allocation change, any remaining plan design change Impact of steps on financials Pension Risk Transfer Asset Allocation Size of transfer Form lump sums vs. annuity purchase Risk change of remaining plan (PRT of all retiree liability will significantly change the liability duration) Recently contributed stock impact of sale or repurchase Any illiquid assets (contribution of property)? What allocation will be looked at favorably to help reduce costs for large PRT (in-kind transfer)? Annuity Purchase Buy In vs. Buy Out Size of purchase Buy In vs. Buy Out Use as hedge? Use for Settlement timing control? In preparation to terminate/buy out? Cultural Considerations Administration will be a key consideration (they will be the face for your retirees) Are plan participants prepared for retirement under non-defined benefit designs? 30 Copyright 2014 Deloitte Development LLC. All rights reserved.
31 Ongoing Monitoring Approach Leading plan sponsors establish proactive processes for de-risking pension programs over time. This process includes a robust ongoing monitoring component. 31 Copyright 2014 Deloitte Development LLC. All rights reserved.
32 Preparation for Plan Termination There are numerous activities that must be undertaken in preparation for plan termination. Near term planning is followed by short-term monitoring, and final execution. Near Term Planning Short-term Monitoring Final Execution Financial Termination Business Case Evaluate ongoing costs Compare to termination costs Establish timeline and triggers De-Risk and Monitor Implement asset risk strategy Evaluate liability approaches Monitor against triggers Execute Termination Evaluate annuity providers Purchase final annuities Data Work Benefit Calculations Pay Out Final Benefits Administration Evaluate current census data Clean and finalize data Finalize benefit calculations Calculate optional forms of benefit Process final elections and transfer admin to insurer Pay lump sums Legal Prep Work Review plan documentation Confirm plan compliance Understand termination timeline Clean Up Update documents as needed Implement compliance fixes Finalize File for determination letter Prepare required PBGC and IRS filings Communication Planning Understand employee impact Establish high level plan Drafting Prepare employee communications Consider bigger picture retirement implications Implement Distribute election forms Complete other required communications 32 Copyright 2014 Deloitte Development LLC. All rights reserved. 32
33 Data Clean-up Clean data enables the ability to execute certain derisking strategies within a tight timeframe Improved governance is an additional benefit in executing a data clean-up TV cash-out strategy Annuity purchase Plan termination Maintaining accurate data is an important part of the Governance and Oversight Process Cleaning the vested term population data now could generate significant cost savings in the future Calculating benefits now in bulk, rather than paying administrator for individual calculations in future Doing a calculation on a Terminated participant in the future could be upwards of $400 per participant Many plan sponsors are currently undergoing an assessment to determine how ready their data is to act on de-risking strategies Governance and Oversight Good governance is increasingly recognized as an important aspect of an efficient private pension system Advantages of Strong Governance Minimize issues that could arise between stakeholders Create trust among stakeholders Reduces cost of overly burdensome compliance needs Facilitates supervision Lowers operational and investment risk 33 Copyright 2014 Deloitte Development LLC. All rights reserved.
34 Latest Developments
35 Pension Risk Management Latest Developments Latest Developments For Pension Plan Sponsors Financial risk management has remained a priority among CFOs, many plan sponsors have moved towards derisking investments and offering former employees lump-sum payments to eliminate longevity and market risk Rising interest rates and strong equity market returns have improved the funded status of pension plans for many sponsors, increasing the focus on asset and liability risk management tactics PBGC premiums have risen substantially, and companies with frozen plans and large terminated vested populations are moving aggressively to shrink the plans and evaluate full or partial plan terminations Additional insurance companies are entering the pension risk transfer market, which should provide additional capacity and competition for plan sponsors looking to terminate their plan Society of Actuaries released exposure drafts of the new mortality study in January 2014 confirming mortality improvements in the U.S. have significantly outpaced typical assumptions. New mortality table and projections expected to be in place as early as YE 2014 for accounting IRS adoption likely in 2016 or 2017 for ERISA funding Expected 5.0% 8.0% increase in liabilities for traditional plans. U.S. regulators reviewing retiree lump sum programs offered by some employers in 2012 and Four favorable PLRs issued in April 2014 Potentially more cost-effective than purchasing annuities but requires employee election 35 Copyright 2014 Deloitte Development LLC. All rights reserved.