Vested Termination Lump Sum Window Right for your company? September 25, 2014

Transcription

1 Vested Termination Lump Sum Window Right for your company? September 25, 2014

2 Agenda Background Considerations Administration Communications Wrap Up Q&A 2

3 Speakers Dean Aloise, ASA, FCA, EA, MAAA Managing Director Wealth Practice Peter J. Borgman Senior Vice President Retirement Products and Services Thomas Mosher, FSA, EA, MAAA Principal and Consulting Actuary Wealth Practice Phil Parker, FCA, EA, MAAA Principal Global Technology Delivery and Solutions Practice 3

4 Purpose of Today s Webinar Balanced View There are pros and cons One size does not fit all Make Clear the Financial Benefits Can be significant savings Example shown later: Spend $250,000 to save $3.3 million Highlight the Potential Risks and Participant Impact May be financial gotchas up front Participants focus is critical to ensure this program is a win win for all 4

5 Administration Terminated Vested Lump Sum Window Administration Capabilities: Deep experience in administering client programs Standard processes and tools for handling target populations ranging from ,000 participants Xerox has handled over 40 client programs in the past 3 years Xerox is currently handling 14 client programs Flexible solutions to cover end-to-end program requirements Cross-functional teams configured to cover design, development, operations, fulfillment, and call center support 5

6 Background

7 Background Defined benefit plan sponsors have been considering and implementing de-risking investment strategies in the wake of interest rate and market turbulence over the last 20 years. As plans begin to return to being fully funded again, sponsors may want to consider permanent risk transfer options, including administrative and design alternatives. Very recently, interest in one such option has escalated offering terminated vested participants a payout through lump sum windows. Terminated vested lump sum (TVLS) windows are very prevalent in 2014 and activity is expected to remain high into Factors influencing decisions about executing a TVLS window vary by plan and by company Plan structure open, closed and frozen pension plans Cost/benefit to execute window Investment management considerations Perspectives on paying lump sums 7

8 Pension Plan De-Risking Approaches Offer Participants Lump Sums Participants must elect to receive a lump sum Settle liability directly with participants for an amount close to accounting liabilities Purchase Group Annuities Plan sponsors can elect to transfer pension liability to high quality insurance carrier Premiums can exceed accounting liabilities by 10-30% U.S. insurers capacity raises some concern Retain Liabilities and Manage Risk More Closely Plan payments typically expected to continue for 80+ years Sponsors have structured long term LDI strategies to mitigate pension cost and funded level volatility Certain demographic risk transfer products may proliferate 8

9 Alternative Lump Sum Tactics Limited one-time option or window : Plan is amended to provide lump sum elections to all or a portion of terminated vesteds: Separate from mandatory small cashout sweeps or other existing plan provisions for lump sums Lump sum paid only if valid elections made during temporary window period Qualified Joint and Survivor Annuity and Qualified Optional Survivor Annuity must also be offered (with spouse as beneficiary) if participant is retirement eligible, all optional forms otherwise available to participant must also be offered Providing lump sum election to retirees in pay status requires private letter ruling Permanent optional form of payment: Offer option to all terminating employees or only those who are eligible for retirement Restrict eligibility to lump sums below a threshold (e.g. $10,000) to eliminate deemed smaller annuity benefits Permanent feature can add significant cost to annuity contract upon plan termination 9

10 Considerations

11 TV Lump Sums Considerations: Summary Key Advantages Permanent liability reduction Reduced future administrative costs - most notably plan administration and PBGC premiums that are scheduled to increase considerably Pending change in mortality tables effective in the near future will increase both liabilities and lump sum costs Lump sums are less expensive than purchasing annuities Accelerates participant access to retirement assets Disadvantages Potential settlement accounting charges In some cases, additional contributions to maintain funding status Loss of investable assets (perceived value of asset arbitrage) Potentially significant short term administration costs Anti-selection among lump sum eligibles Participants left to managing their retirement savings on their own 11

12 Detail on PBGC Premiums Year Flat Rate (previous law) New Law Flat Rate Variable rate per $1000 of underfunding (previous law) New Law Variable Rate Variable rate cap (previous law) New Law Variable Rate Cap 2013 $42 Same $9 indexed ($9) Same $400 Same 2014 $49 Same 2013 rate indexed + $4 ($14) 2015 $49 indexed $ rate indexed + $5 (at least $19) 2016 $49 indexed $ rate indexed (at least $19) Same $400 indexed ($412) 2014 rate indexed + $10 (at least $24) 2015 rate indexed + $5 (at least $29) $400 indexed (at least $412) $400 indexed (at least $412) Same Same $ $49 indexed $64 indexed 2015 rate indexed (at least $19) 2015 rate indexed (at least $29) $400 indexed (at least $412) $500 indexed 12

13 Status of Mortality Table Changes The Society of Actuaries (SOA) announced on July 28 that updated mortality tables will likely be released by October 31, For accounting purposes, auditors may recognize mortality studies published by actuarial organizations: The new mortality tables released in October will be a factor for consideration for 2014 year end disclosure (affecting next year s expense) Major accounting firms have issued guidance indicating that they will expect sponsors to: Consider the effects of the SOA s updated mortality tables, and Document rationale for best estimate for mortality rates For funding purposes, benefit restrictions, PBGC premiums, and minimum lump sums, actuarial organizations studies on assumptions have traditionally been taken into account by the IRS and other government agencies: Timing for the adoption of new mortality tables has not been announced Given that IRS has promulgated mortality assumptions to use through 2015, updates might not take place until at least

14 Financial Cost Alternate Measurements The value of an individual s pension liability varies depending on the purpose of the calculation, primarily due to the interest rate used. Annuity purchase Determined by the annuity provider, generally conservative fixed income rates with margins and expense loads 2.75% Accounting Spot fixed income rates as of measurement date 5.00% PBGC variable premium Lump sum Funding (MAP-21) Funding (HATFA) Same basis as for lump sums (e.g., 0-4: 1.25%, 5-19: 4.57%, 20+: 5.60%), no lag period 1 month average of fixed income rates, with a lag period that may be more than a year (e.g., 0-4: 1.40%, 5-19: 4.66%, 20+: 5.62%); basis close to accounting 25-year average of fixed income rates, subject to collar (0-4: 4.43%, 5-19: 5.62%, 20+: 6.22%) 25-year average of fixed income rates, subject to revised collar (0-4: 4.99%, 5-19: 6.32%, 20+: 6.99%) 5.15% 5.21% 5.92% 6.63% Risk adjusted Long term expected return on assets 8.25% 14

15 Financial Cost Variance Between Accounting Methods Expected Return on Assets ASC (FAS) IAS Mark to Market ASC (FAS) Long term expectation Equal to discount rate Long term expectation Gain/Loss Upon Remeasurement P&L amortization if outside corridor Immediate recognition in P&L Immediate recognition in P&L Settlement - One Time Charge/Credit If amount settled is greater than Service Cost + Interest Cost None None 15

16 ASC (FAS) Accounting Impact: Settlement Charge - Example (in $millions) Before TVLS Window Impact of Window After Window 1/1/15 $ (97.0) $ 13.9 $ (83.1) 1/1/ (13.2) 89.4 Funded 1/1/15 $ 5.6 $ 0.7 $ 6.3 FY 2015 Expense Service cost $ 2.6 $ 0.0 $ 2.6 Interest cost 4.9 (0.7) 4.2 Expected return (8.0) 1.1 (6.9) Amortization 2.3 (0.4) 1.9 Total $ 1.8 $ 0.0 $ 1.8 Settlement Charge Assumes unamortized loss position is $36.5 million 16

17 Possible Tactic to Avoid Settlement Charge Sequential Targeted Lump Sum Windows Lump Sum Amount No. of Participants 1/1/2015 Lump Sum Value (in $millions) Cumulative No. of Participants Cumulative 1/1/2015 Lump Sum Value < $10, $ $0.7 $10,000 $24, $4.5 1,351 $5.2 $25,000 - $49, $5.1 1,868 $10.3 $50,000 - $74, $2.7 2,023 $13.0 $75,000 - $99, $1.5 2,081 $14.5 $100,000 - $249, $3.1 2,154 $17.6 $250, $2.4 2,173 $20.0 Total 2,173 $

18 Cost/Benefit Analysis - Example Take Rate 50% Source One-time Cost Savings Recurring (Year 1) Present Value Administration/Actuarial Administration of Window Participants $ 250,000 $ (6,250) $ (175,000) Data Maintenance - sponsor $ (1,250) $ (35,000) Valuation Processing - actuary $ (500) $ (14,000) PBGC Premium Flat rate reduction $ (39,900) $ (1,161,000) Variable premium reduction $ (55,100) $ (336,568) Mortality Improvement Minimum funding requirement $ (218,057) $ (1,292,000) PBGC variable premium $ (48,140) $ (294,054) Total - Ongoing Basis $ 250,000 $ (369,197) $ (3,307,623) Versus Annuitization (Insurance Contract) (8,482,500) (8,482,500) Settlement Accounting One-time charge $ 4,171,028 Change in expense $ 4,244 18

19 Investment Strategy Considerations Asset Investment Arbitrage: Perception of investment advantage of return on assets out-earning future increases in liabilities Immediate impact is difference between assumed rate of return on assets and expected interest cost on liabilities released Arbitrage is two-sided In the short term, asset returns can be positive or negative, and are variable Value of arbitrage depends on asset investments, interest rate volatility assumptions, and time horizon Timing: Modeling higher future interest rates will determine a break even point: Reduction (savings) in lump sum payout pays for carrying costs and potential liability increase events Liquidation of potentially large amount of assets to pay lumps Lead time to transition smoothly re-allocation of assets 19

20 Administration

21 Workflow 21

22 Best Practice Considerations Call center: Establish specialty call center with separate toll-free number Avoids calls to HR: Elections on the web Data remediation: Planning will need to reflect extra time to make data complete, including determining if participants are alive and updating address information Spouse DOB: If marital status is known but spouse s DOB is not, use assumed Spouse DOB = Participant DOB to prepare benefit statements. If spouse s DOB is later provided, DOB and benefit calculations need to be updated 22

23 Best Practice Considerations (cont.) Rollovers: Does the DC plan accept rollovers from the DB plan? If not, consider amending the DC plan to allow this choice. If rollovers are permitted, make sure the DC plan is ready to handle QDRO: Are QDRO liabilities clearly defined on the administrative system? If the administrator is not able to provide details in time for the offering, these participants are generally excluded (as well as participants with QDROs under determination) Response time: Optimal window period is 45 days. Reminder postcard if no response one month into response period Backend/Processing: Do you have a clearly defined procedure for processing distributions? Expect a high volume in a short time period. Packages are processed as received, but last-minute returns and follow-up will extend 2-3 weeks following the election period and we need to build your current process into this accelerated schedule 23

24 Communications

25 Communication Goals Awareness: Opportunity is coming Understanding: How the opportunity works Analysis: Decision support Action: How to elect Follow-up: What to do with payment 25

26 Communication Considerations Anticipate questions and noise from current employees; prepare managers, HR and employee relations Make it easy for participants to share offer details with family and financial advisors by providing personalized information Post all written communications on the website Keep the opportunity top-of-mind by staggering release of announcement postcards or sending supplemental announcements Additional options to consider: Webinars, Q&As, outbound calls, modeling tools, investment education 26

27 Wrap Up

28 Lump Sum Window Path to Risk Transfer Data Issues Logistics/ Rationale Communication Strategy Compliance Asset Management Risk Transfer Incomplete data Timing/ Delivery Announcement Procedure review and oversight Fund to appropriate level Lump sum offering Outdated information Resources Decision guide Amendments, SPD updates Liquidity requirements Elections Estimated accrued benefits Project management Election packages Package content Directive for payment Locating deferred vested participants Cost/benefit Reminder Maintenance of Records Investment strategy 28

29 Next Steps Contact Us We have a cross-practice team that brings together the expertise in each service area. Today s speakers are both on the cross-practice team. Contact either: Tom Mosher Phil Parker Our clients should reach out to: Your client manager Your lead Retirement consultant Your current administration team lead Set up a complimentary, in-person meeting or a private webinar for your management team/colleagues We can present the contents of today s webinar to a broader internal audience. Read more about current topics, and join in the on-line discussions related to lump sum windows on our blog at: 29

30 Q&A 30 30

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