Transcript Katie Houston - Tulane University

PENSION PLANS
Katie Houston
BACKGROUND
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Graduated from The University of Texas
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2004 – 2007
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Third Party Administrator (TPA) for Defined
Contribution Plans
2007 – 2014
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Bachelor’s Degree in Mathematics
TPA for Defined Benefit Plans (Allstate, 3M,
Northrop Grumman, US Government, Entergy)
2014 – Present
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Work for Entergy in-house on their pension plans
ERISA
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Employee Retirement Income Security Act of 1974
Sets standards for:
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Vesting
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Funding
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Changed under Pension Protection Act of 2006
80% funding requirement
If funded, only have to contribute benefits earned that year
In under-funder also have to amortize over 7 years to fund
Participation
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Cliff Vesting after 5
Graded Vesting years 3-7 (20% each)
Originally age 25, now age 21
Guarantees benefits through Pension Benefit
Guarantee Corporation (PBGC)
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These are guaranteed if a plan is terminated
RECENT PENSION ACTIVITY
Shift from traditional Final Average Pay (FAP)
pension plans to Cash Balance (CB) plans
 FAP pension plans tend to be more popular with
older, long service employees
 With the work force changing jobs more
frequently, employees are not as drawn to FAP
plans as they once were
 Entergy had to make decision whether to switch
from FAP to CB or not
 Also look at pension de-risking strategies
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INDUSTRY COMPARISON
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An index of 100% represents the average employer
provided benefit value of 600 sample companies
Industry
Retirement
Income
Retiree
Health Care
Pharmaceuticals
119%
176%
Energy/Oil/Mining
152%
168%
Utilities
132%
329%
Chemicals
116%
67%
Automotive
103%
77%
Finance
108%
44%
Industrial Equipment
105%
164%
Aerospace/Defense
106%
25%
97%
212%
Banks
104%
25%
Research/Testing
103%
179%
Personal/Consumer/Office/Products
104%
101%
Diversified/Other
100%
159%
Food and Beverage
105%
61%
Accounting/Consulting
ENTERGY’S FAP PLANS
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7 main plans
23 sub-plans and appendices (unions)
 Each appendix has a unique way of calculating
benefits
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Result of mergers and acquisitions
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Must keep existing level of benefits
Pair with a 401(k)
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70% match up to 6% of contributions (4.2%)
FAP GENERAL GUIDELINES
Assets of all participant’s benefits are held in a
master trust
 Treasury department invests these assets
 Annually, actuaries project future benefit
obligations for each participant
 The pension trust must be funded at 80%
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MAIN FAP PLAN
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1.5% x Years of Service (up to 40) x FAME
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Key Points
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5 year cliff vesting
Benefits calculated at age 65 then reduced to
commencement date
Earliest you can access benefits is age 55
Only offer annuity optional forms of payment
Employer bears the investment risk
CALCULATION EXAMPLE
Work for the company for 25 years
 Age 55
 Average salary (highest 5 out of 10) $110,000
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1.5% x Years of Service (up to 40) x FAME
 1.5% x 25 x ($110,000/12) = $3,437.50 (Age 65)
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CALCULATION EXAMPLE CONTINUED
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$3,437.50 (age 65 benefit)
If work until 55, reduce 1/12 of 2% for each
month you are prior to age 65
At age 55
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120 months x 1/12 x 2% = 20%
Age 55 benefit
$3,437.50 x (1 – 20%) = $2,750.00
 80% of age 65 benefit
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CALCULATION EXAMPLE CONTINUED
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$3,437.50
If leave work prior to 55, reduce 1/12 of 7% for first 60
months the 1/12 of 6% for additional months
At age 55
60 months x 1/12 x 7% = 35%
 60 months x 1/12 x 6% = 30%
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Age 55 Benefit
$3,437.50 x (1 – 35%) = $2,234.38
 $2,234.38 x (1 – 30%) = $1,564.06 (45% of original benefit)
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FAP PAYMENTS
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Annuity optional forms available
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Single Life Annuity
25% J&S
33 1/3% J&S
50% J&S
66 2/3% J&S
75% J&S
100% J&S
10 Year Certain and Life
Age 62 Level Income
Actuarial factors defined by the Plan
 All optional forms are actuarially equivalent
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FAP PAYMENT EXAMPLES
ENTERGY’S CASH BALANCE PLAN
Annual Pay Credit Contributions
 Annual Interest Contributions
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Key Points
3 year cliff vesting
 Benefits calculated as of when they are earned
 Can access benefits as soon as terminated
 Lump sum and annuity optional forms of payment
 Employer bears the investment risk
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Pair with a 401(k)
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100% match up to 6% of contributions
ANNUAL PAY CREDITS
Percentage of base salary
 Based on Age + Service
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ANNUAL INTEREST CREDITS
Based on August 30-Year Treasury Constant
Maturity Rates
August 2014
3.21%
 Floor 2.6%
August 2013
3.76%
 Ceiling 9%
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August 2012
2.77%
August 2011
3.65%
August 2010
3.80%
August 2009
4.37%
August 2008
4.50%
August 2007
4.93%
August 2006
5.00%
SAMPLE CALCULATION
Date of Birth: 5/1/1980
 Date of Hire: 1/1/2014
 Pay Rate: $50,000
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Opening
Year
Balance
Age as
of 1/1
2014
33.6667
2015
$0
$2,000
34.6667
Vesting
Points
Service
0
1
33.6667
35.6667
2014 2013
01 13
01
- 1980
05
01
33
8
0
Age = 33 + (8/12) + (0/365.25) = 33.6667
Pay
Credit
%
Pay Credit
Interest
Credit
Closing
Balance
4%
50,000 *0.04
= $2,000
0 * .0367
= $0
$2,000.00
4%
50,000 *0.04
= $2,000
2,000 *
.0321 =
$64.21
$4,064.21
CASH BALANCE PLAN PAYMENTS
Benefit is calculated as a lump sum
 Can be paid as an unreduced one-time payment
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Annuity options also available
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Single Life Annuity
50% J&S
75% J&S
100% J&S
Conversions based upon IRC Section 417(e)(3)
 All optional forms are actuarially equivalent
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CASH BALANCE PAYMENT EXAMPLES
NON-QUALIFIED BENEFITS
Both the FAP and CB Plans have NQ Plans
 Apply to pay over 401(a)(17) limit
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Current limit $265,000
ERISA does not apply
 PBGC does not apply
 Required to take lump sum payment 3.5 months
following termination
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ENTERGY’S DECISION
Keep existing employees in FAP plans
 All new hires on or after 7/1/2014 into CB plan
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33 unions will negotiate into the Bargaining CB
plan as their Collective Bargaining Agreements
(CBA’s) expire
PENSION DE-RISKING STRATEGY
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Terminated Vested Lump Sum Window
All non-bargaining terminated vested employees
 Terminated prior to 7/1/2014
 No age requirement
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Voluntary opportunity to take deferred pension
annuity as one-time lump sum
Benefits:
2016 actuarial tables changing
 PBGC premiums currently $49, raising to $64
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QUESTIONS?