late breaking pension developments 2:00 – 3:00 maac meeting – september 13, 2012
DESCRIPTION
Late Breaking Pension Developments 2:00 – 3:00 MAAC Meeting – September 13, 2012. Jim O’Neill PBGC Actuary Corporate Finance and Restructuring Department (‘CFRD’). Tonya B. Manning, FSA IRS Actuary Employee Plans. Update on Guidance & Review of Notice 2012-61. Update on Guidance. - PowerPoint PPT PresentationTRANSCRIPT
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Late Breaking Pension Developments2:00 – 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’)
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Update on Guidance & Review of Notice 2012-61
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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 2010 2nd single-employer notice in
clearance• Delayed effective date plans• Benefit restrictions / frozen plan relief
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Update on Guidance
• Still working on Hybrid Plan regulations
• Working through difficult issues
• Regulations described in Notice 2011-85
regarding market rate of return not
effective for plan years beginning before
1-1-2014 (see Notice 2012-61)
• Finalizing Section 417(e) regulations
proposed in February 2012
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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)
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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
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Segment Rate Corridor
If the plan year
begins in
Minimum
percentage
Maximum
percentage
2012 90% 110%
2013 85% 115%
2014 80% 120%
2015 75% 125%
2016+ 70% 130%
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Notice 2012-61
• 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
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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)
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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 3rd
segment rate (§ 430(h)(2)(C)(iv))
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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
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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
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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
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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
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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 2013+
• Determination of average value of assets (AVA) • May be affected MAP-21 due to cap on expected
return by the 3rd segment rate
• Can affect AVA, even if the funding target is calculated using the full yield curve
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How MAP-21 Affects Assets
• Option for § 404(o) asset value
• If 3rd segment rate (after application
of MAP-21 collar) > unadjusted 3rd
segment rate, plan may elect to use
§ 430 asset value for § 404(o)
calculations
• No similar rule for asset value for
§ 420 purposes
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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)
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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
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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
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Section 436 Issues
• Initial certifications made after
9/30/2012:
• Are presumed to be done with
knowledge of MAP-21 and Notice
2012-61, and
• Material change and irrevocability
rules apply
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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
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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
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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
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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
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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’
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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
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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
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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
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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
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Other Issues
• Must recalculate AFTAP for plan
years beginning in 2012 unless
MAP-21 is deferred to 2013 for
§ 436
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Late Breaking Pension Developments
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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
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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
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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.
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PBGC Premiums
• Summary of MAP-21 changes to Single-Employer Premiums (assuming no indexing)
Current Law MAP-21
Flat VRP Flat VRP
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 UVBcapped 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 UVBcapped at $400 x P-
count
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PBGC Premiums
• Single-employer premium rates assuming 3% increase in NAW:
YearFlat-rate Premium Variable-Rate Premium
Rate per Participant Rate per $1,000 of unfunded vested benefits Per participant cap
2012 $35 $9 N/A
2013 $42 $9 $400
2014 $49 $14 $412
2015 $50 $19 $424
2016 $52 $20 $437
2017 $54 $21 $450
2018 $55 $21 $464
2019 $57 $22 $478
2010 $59 $23 $492
2011 $60 $23 $507
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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
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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
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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.
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Recent PBGC Guidance
• PBGC Technical Update 12-2– MAP-21 Stabilized Rates do not apply for 4010 gateway test per IRS
notice 2012-61. 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 § 4010.11(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 § 4010.8(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 § 4010.8(a)(11) are the amounts used to determine the minimum funding requirement for the plan year ending within the information year.
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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
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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
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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