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4th Quarter 2007 Executive
Summaries
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A combination of regulatory and economic factors had greatly weakened the funding of defined benefit single employer pension plans at the beginning of the 21st century, thereby threatening the long-range solvency of the Pension Benefit Guaranty Corporation (PBGC).The Bush administration proposed an overhaul of pension law consistent with modern financial theory that would strengthen pension plan funding and protect PBGC by increasing the cost and volatility of employer contributions. After a lengthy and complex national debate, most of this proposal was enacted into law as the Pension Protection Act of 2006. This article examines the dynamics of that debate and its eventual outcome.
PPA—What Will It Mean For Pension Plan Sponsors?
by Jerry Mingione, Towers Perrin
The Pension Protection Act, with requirements that will be phased in beginning in 2008, implies some significant changes for defined benefit pension plans. In addition to discussing how PPA will affect plans at various funded levels and how it changes options available for plans that accumulate a surplus, the author of this article addresses concerns about whether plan contributions will become more volatile under PPA than under current law by forecasting contributions under hypothetical plan investment assumptions. He also presents survey responses from plan sponsors that were asked how they are likely to adapt to the combination of PPA and new Financial Accounting Standard (FAS) 158.
Back To The Benefits Basics: DB Or Not DB—That Is The Question
by Glenn D. Bowen and Alan H. Perry, Milliman
Recently, the decision to freeze a defined benefit (DB) plan appears to be a reaction to the plan's recent cost and impact on the company's financial statements, both heightened by wide swings in the equity and bond markets. Now companies are staring at new pension funding and accounting rules, fearing that the situation will only get worse. However, the authors of this article argue that such fear may be misplaced. The new funding rules should allow many sponsors to actually reduce the volatility of required funding costs and accounting impacts. For that matter, this revisited approach—which harkens back to the way pensions were once funded and managed—more closely resembles how companies fund defined contribution (DC) plans.
The Evolution Of Pension Investment And Risk Management In The United States
by Chris E. Goebel and Phillip M. Kivarkis, Hewitt Associates
The pension environment has been transformed, in the United States and around the world, due to recent regulatory and legislative changes. Pension plan sponsors have become increasingly aware of the costs and financial risks inherent in their plans. Over the past decade, plan sponsors have been prompted to take action to address these concerns in order to avoid potentially adverse financial results. This article identifies the challenges facing pension plan sponsors, presents a spectrum of risk-management solutions available to address these challenges, and describes how the most appropriate level of risk controls can be implemented via various pension investment and risk-management techniques.
Life In The Yellow Zone: Operating An Underfunded Multiemployer Plan Under PPA
by William J. Ruschau, Mercer Human Resource Consulting
The Pension Protection Act (PPA) of 2006 introduced new requirements for multiemployer pension plans that apply to plan years beginning in 2008 or later. This article reviews PPA's requirements for multiemployer plans, explains the options available to employers and stresses the importance of advance preparation. Overall, the author finds PPA has imposed a more rigid discipline— and may force action sooner than would have otherwise occurred—but it has not changed the focus of the sponsors and trustees of underfunded multiemployer pension plans. To a large degree, PPA simply establishes parameters that most plans would follow anyway.
Leveraging PPA To Manage Defined Contribution Plan Risk
by Alison Borland, Pam Hess and Rob Reiskytl, Hewitt Associates
New opportunities offered by the Pension Protection Act of 2006 (PPA) are now available to support plan sponsors in their decision making and efforts to effectively manage the risks associated with their defined contribution programs. This article describes the risks of inaction and suggests specific steps employers can take to ensure alignment of plan design and business goals, optimize results for employees and take advantage of the opportunities offered by PPA. Among these opportunities are protections for plan sponsors in selecting default funds, a Roth 401(k) feature and a new safe harbor plan design.
Full text copies of these articles are available through the INFOSOURCE™ Document Delivery Service. Article reprints are also available in quantities of 100 or more. For information, call the Publications Department at (888) 33-IFEBP. You can order your subscription (reprints and back issues) online. Four issues for $125 (or $95 for CEBS registrants).