430 likes | 571 Views
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.
E N D
Late Breaking Pension Developments2:00 – 3:00MAAC 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 • 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
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
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)
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
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
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)
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))
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 § 4010of ERISA
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
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
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
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
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
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)
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
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
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
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
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
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
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
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’
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
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
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
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
Other Issues • Must recalculate AFTAP for plan years beginning in 2012 unless MAP-21 is deferred to 2013 for § 436
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
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
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.
PBGC Premiums • Summary of MAP-21 changes to Single-Employer Premiums (assuming no indexing)
PBGC Premiums • Single-employer premium rates assuming 3% increase in NAW:
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
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
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.
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.
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
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
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