Transcript Status Report I January 25, 2002

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
• 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
3
• Delayed effective date plans
• Benefit restrictions / frozen plan relief
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
4
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)
5
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
6
Segment Rate Corridor
7
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%
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
8
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)
9
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))
10
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
11
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
12
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
13
• Underlying annuities are valued
using § 430 rates
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
14
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
15
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
16
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)
17
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
18
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
19
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
20
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
21
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
22
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
23
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
24
• Elections to reverse funding balance elections
must be made by the end of the plan year
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’
25
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
26
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
27
• NOTE: This is an exception to the
general position of the IRS
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
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• May not change elections already
made to USE credit balances
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
29
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
Page 31
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
Page 32
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
Page 33
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.
Page 34
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 UVB
capped at $400 x Pcount
2014
$35
$9 per $1,000 UVB
$49
$13 per $1,000 UVB
capped at $400 x Pcount
2015
$35
$9 per $1,000 UVB
$49
$18 per $1,000 UVB
capped at $400 x Pcount
35
Page 35
PBGC Premiums
•
Single-employer premium rates assuming 3% increase in NAW:
Flat-rate Premium
Year
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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Page 36
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
Page 37
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
Page 38
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.
Page 39
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.
Page 40
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
Page 41
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
Page 42
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
Page 43