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’)

Update on Guidance & Review of Notice 2012-61

3

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

4

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

5

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)

6

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

7

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%

8

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

9

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)

10

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))

11

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

12

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

13

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

14

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

15

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

16

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

17

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)

18

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

19

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

20

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

21

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

22

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

23

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

24

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

25

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’

26

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

27

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

28

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

29

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

30

Other Issues

• Must recalculate AFTAP for plan

years beginning in 2012 unless

MAP-21 is deferred to 2013 for

§ 436

Page 31

Late Breaking Pension Developments

Page 32

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 33

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 34

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 3535

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

Page 3636

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

Page 37

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 38

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 39

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 40

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 41

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 42

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 43

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