Blogging Employee Benefits

March 31, 2006

FASB Exposure Draft of New GAAP for Pensions and OPEBs

Filed under: Accounting, OPEBs, Pensions — Fuguerre @ 7:48 am

The Financial Accounting Standards Board has published its exposure draft of a new accounting standard for employers' accounting for defined benefit pension plans and other post-employment benefits. [No. 1025-300; News Release]

  • Unrecognized Balances Move To Balance Sheet – Unrecognized gains or losses, unrecognized prior service costs from plan amendments, and any remaining unrecognized net asset or obligation from original transition to the current accounting rules would be reported as a charge or credit to other comprehensive income (OCI), net of tax timing differences, essentially decreasing or increasing the net worth of the company. For the overwhelming majority of employers that sponsor defined benefit pensions or OPEBs, the change would reduce or even eliminate the company's net worth, due to huge balances of unrecognized net losses accumulated through the past six years of declining interest rates and weak asset returns during 2000-2002.
  • Measurement Date Synchronized With Financial Statement Date – The measurement date would be required to be the close of the fiscal year, instead of the current rule that permits measurement as early as 3 months before the close of the year.
  • Effective As Early As End of 2006 – The key balance sheet changes would be effective for fiscal years ending after 12/15/2006. For any financial statement issued under the new standard, all previous years that are displayed would be required to use the new rule for relevant balance sheet amounts, unless impractical to do so. For balance sheet reporting by all employers, the measurement date change would be effective for fiscal years ending after 12/15/2007. For that change, previous years reported on any financial statement should use the amounts determined as of the original measurement dates. For determination of pension or OPEB cost for taxable public employers, the measurement date change would be effective for fiscal years beginning after 12/15/2006. For determination of pension or OPEB cost for tax-exempt entities and non-public entities, the effective date would be delayed a year, to fiscal years beginning after 12/15/2007.

FASB seeks comments on the exposure draft by 5/31/2006. The final standard is expected to be published in September 2006. Following publication of the final standard, FASB would proceed to phase 2 of its pension/OPEB project, conducting a sweeping overhaul of the complete standard for measurement and reporting of pension and OPEB costs, assets and obligations.

See Fugue: Accounting for links to additional source documents and previous Pensions & Benefits Weblog posts on the FASB pension/OPEB accounting project.

March 29, 2006

About Those April 15 Quarterlies

Filed under: Actuarial, Legislation — Fuguerre @ 10:33 am

Congressional conferees working toward compromise pension reform legislation had originally aimed toward having a bill ready before the end of this month, hoping to have House and Senate votes within the first week of April, the idea being that enactment could come in time to settle some uncertainty over quarterly contributions due for pension plans on April 15. That schedule was rather ambitious from the start, but it's finally quite clear that what's now being characterized by some legislators as an "arbitrary" deadline will not be met. In the relatively unlikely circumstance that the legislation would actually have affected an April 15 contribution, a pension sponsor might still want to wait one more week to cut the check, just to be sure some legislative miracle does not occur. For the majority, the legislation would not have changed things just yet. Some notes –

  • Even under the proposed legislation, the existing quarterly contribution requirement would have remained intact for 2006, the only potential change of relevance being the interest rate assumption for valuing current liability for 2006 (which I'll come back to later in these notes). So the basic underlying structure of the quarterly contribution would not have changed until 2007, even if the legislation were to be enacted.
  • Multiemployer plans are exempt, as are money purchase plans. Only single employer plans other than money purchase plans have had to worry about an April 15 installment.
  • Only plans with a calendar plan year (or with plan year starting any other day in January 2006) have a quarterly contribution due April 15. If the legislation continues to drag as congressional elections loom larger through the year, plans with non-calendar plan years beginning in 2006 will come into the picture, but the April 15 deadline does not apply to them. (Any plan with an April 15 quarterly deadline because of a 2005 non-calendar plan year – for example, a plan year beginning 10/1/2005 – would have remained subject to current rules even if the legislation had been enacted on the original ambitious schedule.)
  • A plan that had a current liability funded ratio of at least 100% at the end of 2005 is not required to make a quarterly contribution during 2006. Despite the crisis-mentality concern over the perceived canyon of pension underfunding, quite a large number of plans – indeed, the majority of single-employer defined benefit plans – have assets in excess of current liability, thus are exempted from the quarterly contribution requirement.
  • A plan's credit balance may be used to satisfy a required quarterly contribution (except in the rare situation when liquidity shortfall amounts are involved). In part due to employers making advance contributions as an accounting strategy to elude charges to shareholder equity due to minimum liability, many plans that have unfunded current liability still have a credit balance that reduces or eliminates the contribution that would have been required April 15.
  • Even if you're still in the picture, the legislation might not have changed your quarterly contribution, and you can have already pretty much determined whether or not that would be the case. Your quarterly contribution will be 25% of the lesser of last year's required contribution or 90% of the amount required for the current year, each determined without taking funding waivers into account. The timing concern driving the original legislative schedule concerns the second prong of that determination: the proposed legislation likely will extend use of corporate bond rates as the basis for the interest rate assumption for 2006, whereas without the legislation 30-year Treasury bond rates will apply. Under either alternative, the relevant interest rates are already set (although for the corporate bond rates that would have applied under the proposed legislation, your actuary would have needed to estimate the rates for now, since the IRS ceased publishing the official amounts for those rates after December 2005). If your 90% current-year amount is higher then the 100% prior-law amount under either interest rate, then the proposed legislation would have had no effect on your quarterly contribution. For the very small number of cases not exempted under the earlier points in these notes and with a 90% current-year amount that is potentially less than the 100% prior-year amount, ultimately the quarterly contribution due April 15 might in fact be lower under the proposed legislation. As it becomes completely definite that the legislation will not be enacted before April 15, the scheduled quarterly contribution should then be made according to the current rules; subsequent quarterly contributions for the 2006 plan year might then be lower if the legislation is eventually enacted.

Like every other professional blogger, I don't paper each and every individual blog posting with a separate copy of the disclaimer that nonetheless does apply to all content in this weblog. But every now and then, such as here, a bit of emphasis is worth the extra line: This material is not posted with the intention of providing legal, actuarial, tax, or other professional advice; quarterly contributions or any other matter suggested by this posting should be addressed in consultation with the plan's enrolled actuary and other competent professionals. That said, failure to have the proposed pension legislation enacted by April 15 is probably not going to affect very much in practice.

March 27, 2006

Pension Survivor Annuity Only for Spouse at Retirement

Filed under: Executive Compensation, Litigation — Fuguerre @ 2:57 pm

ERISA's interest in protecting surviving spouses does not extend so far as to require that retirement plans ensure continued benefit payments to anyone whom a plan participant might marry after his retirement and after the death of his spouse.

Survivors benefits under a top hat retirement plan's joint and survivor annuity are not payable to a second spouse married after the death of the spouse to whom the employee had been married when benefit payments had commenced, according to an 11th Circuit decision affirming the district court's summary judgment for the employer. [Holloman v. Mail-Well Corp., No. 05-10850]

Upon retirement in 1991, the individual elected to receive reduced benefits under a joint and survivor annuity option from his employer's top hat plan maintained for its key executives. The plan in force at that time granted his employer authority to amend plan terms, as long as benefits were not reduced. In 1994, his spouse died, and he apparently continued receiving reduced annuity payments consistent with his joint and survivor election. In 1995 he remarried. After his former employer was acquired in 2000, the acquiring company decided to accelerate payments under the plan, basing the individual's ensuing lump sum payment on actuarial assumptions recommended by an outside consulting firm and a single life annuity based only on the individual's life expectancy, without taking into account his current spouse. After the individual's lawsuit was moved to federal court, summary judgment was granted in favor of the employer.

Although there remains uncertainty about the proper standard of review to apply to an administrator's benefit decisions under a top-hat plan, the court found it unnecessary to decide that issue here, observing that in this case the same conclusion would be reached under either a deferential or de novo standard of review. Since the plan included explicit language reserving the right to accelerate benefit payment, and since the plan trustee had not erred in concluding that the acquiring company's board inherited powers that had been reserved for the acquired employer's board, the court concluded that the decision to distribute the lump sum value of benefits did not violate terms of the plan. Since the individual provided no affirmative evidence to show that the lump sum payment was not fully equivalent to the value of the future benefits, the court rejected claims that the acceleration had violated plan terms against benefit reduction, noting that the individual's argument was "essentially saying that the value of any lump-sum payment had to exceed the value of the stream of future payments that it was meant to replace."

Turning to the survivor's benefit issue, the appellate court first distinguished Supreme Court precedent in Boggs v. Boggs (1997), finding that decision inapplicable to top hat plans, which are excluded from ERISA's participation and vesting rules. Moreover, even if qualified joint and survivor rules were to apply, survivor annuity benefits are only available to the spouse married to the individual at benefit commencement, not "to anyone whom a plan participant might marry after his retirement and after the death of his spouse." The court found plan terms defining a participant's surviving spouse as beneficiary irrelevant to the joint and survivor annuity distribution option.

The court further rejected the individual's claim of fiduciary violations, observing that "top hat plans are not subject to ERISA's fiduciary requirements." The appellate court also ruled that the district court had not abused its discretion in denial of motions regarding discovery. Finally, the individual's attorney's appeal to a sanctions order was denied, with the court instructing, "It is by now abundantly clear that a timely and properly filed notice of appeal is a mandatory prerequisite to appellate jurisdiction."

March 24, 2006

Post-Spinoff DB/DC Deductibility

Filed under: Deductibility — Fuguerre @ 10:31 pm

A recent IRS private letter ruling addressed deductibility of employer contributions after spin-off of a portion of a multiemployer defined benefit plan, constituting assets and liabilities attributable to former employees who had never been eligible to participate under a separate multiemployer defined contribution plan. After the spin-off, there will continue to be active and inactive participants benefiting under both the parent defined benefit plan and the defined contribution plan; hence, employer contributions to those overlapping plans will be subject to the deductibility limitation of IRC §404(a)(7). Contributions to the spun-off plan, which does not overlap with the defined contribution plan, will be subject to the deductibility limitation of IRC §404(a)(1), without affecting the 404(a)(7) limit applicable to the other two plans. [PLR 20061201]

Garnishment for Criminal Restitution Order

Filed under: Litigation — Fuguerre @ 6:20 pm

ERISA does not prohibit garnishment of a qualified pension plan to collect a criminal restitution order, according to a divided 9th Circuit ruling reversing a district court decision. [U.S. v. Raymond P. Novak, No. 04-55838] The appellate court determined that the Mandatory Victims Restitution Act of 1996 (MVRA) in conjunction with 18 U.S.C. §3613 constitutes a statutory exception to ERISA’s anti-alienation rule, finding that (a) the MVRA is a specific collection statute providing victims with restitution of property loss, and (b) Congress provided for restitution orders to have the same enforcement power as tax liens, for which ERISA plan benefits may be garnished. In contrast with previous 9th precedent, which had found no equitable exception to ERISA’s anti-alienation rule, the MVRA’s specific provisions permit garnishment.

Dissenting opinion pointed to a narrow exception in ERISA’s anti-alienation rule for crimes against the pension plan itself, but failed to find such an explicit directive under the MVRA.

Revised Regulations for Relative Value Disclosures

Filed under: Distributions, IRS, Regulations — Fuguerre @ 7:27 am

Revised final regulations have been published by the IRS under IRC §417(a)(3) relating to relative value disclosures in explanations of a pension plan’s qualified joint and survivors annuity (QJSA) and qualified preretirement survivor annuity (QPSA). [TD 9256; 71 FR 14798] Highlights –

  • Basic Effective Dates Retained – Although many plans and practitioners had sought further delay, the basic effective date remains intact: for QJSA notices, the requirements are generally effective for distributions with annuity starting dates on or after 2/1/2006. (Note: for 417(e)(3) distribution options with actuarial present value less than that of the QJSA – for example, a lump sum distribution that does not reflect the value of early retirement subsidies – the rules took effect 10/1/04.) However, revision of the rules relating to disclosures of optional forms of benefit approximately equal to the QJSA (described below) need not be applied to QJSA explanations provided before 1/1/2007. Moreover, except with respect to distribution options subject to the original 10/1/04 effective date, reasonable good-faith compliance with the relative value regulations is acceptable for QJSA notices provided before 1/1/07.
  • Eligibility for 2/1/06 Effective Date – As had been provided in 2005 proposed regulations, the actuarial present value of an optional form is treated as not less than the actuarial present value of the QJSA if two conditions are met: (i) The actuarial present value of the optional form is not less than that of the QJSA for an unmarried participant using 417(e) assumptions; and (ii) The actuarial present value of the QJSA for an unmarried participant is not less than that of the QJSA for a married participant using reasonable actuarial assumptions.
  • Retroactive Annuity Starting Dates – Required information must be provided for optional forms of benefit with retroactive annuity starting dates that are available with payments commencing at the time the QJSA notice is provided.
  • Coordination with QJSA-Most-Valuable Rule – As under the 2005 proposed regulations, disclosure of relative values of 417(e) distribution options using the applicable assumptions under 417(e)(3) does not cause a plan to fail the requirement that the QJSA be the plan’s most valuable form of benefit.
  • Approximate Equivalence to QJSA – Reflecting concerns over professional standards, the rules have been revised to restrict disclosure of optional forms as being approximately equal in value to the QJSA only to those within a range of 95% to 105% of the actuarial present value of the QJSA.
  • Social Security Level Income Option – Reflecting dispute over the applicability of 417(e)(3) to a social security level income option, examples of relevant optional annuity forms have been dropped from the regulatory provisions addressing effective dates, but merely because the IRS agrees that placement of the issue in that portion of the rules is inappropriate. The IRS points to separate regulations under 417(e) to retain the position that social security level income optional distribution forms are not eligible for exemption from the minimum present value requirements of 417(e)(3).
  • Reasonable Actuarial Assumptions – For optional forms other than those subject to 417(e), reasonableness of interest and mortality assumptions is determined without reference to individual circumstances (e.g., participant’s specific health conditions). Applicable assumptions under 417(e) are permitted, but not required, for relative value disclosures for those distribution options.
  • Bifurcated Distributions – If separate benefit elections are made with respect to two or more portions of a participant’s benefit (e.g., such as in the case of preservation of a portion of benefit from a predecessor plan), then relative value and financial effect disclosures may be made separately for each separate portion.
  • Disclosure of Normal Form – For purposes of disclosing the plan’s normal form of benefit, reasonable estimates such as are used to disclose participant-specific information may be used.
  • Use of Participant-Specific Information – Inclusion of participant-specific information does not cause a notice to fail rules permitting reliance on generally applicable information.
  • Simplified Disclosures of Financial Effect – Simplified presentations of financial effect and relative value are permitted for disclosure of a significant number of substantially similar optional forms (for instance, an array of joint and survivor annuities with survivor payments available at any whole number percentage between 50% and 100%).

OECD Guidelines for Pension Fund Asset Management

Filed under: Investment — Fuguerre @ 5:51 am

The Organization for Economic Co-operation and Development has published OECD Guidelines for Pension Fund Asset Management. Prepared by the organization’s Insurance and Private Pensions Committee and Working Party on Private Pensions, the guidelines mark an initiative by the world’s economic leaders to set international standards for pension fund investment management and oversight, complementing the OECD Council’s 2004 Core Principles of Occupational Pension Regulation. [OECD Website Release]

Endorsed by all 30 member governments, including the U.S., the guidelines enunciate best practices for pension fund investment regulation, centered on the basic premise that the regulatory framework should reflect the retirement income objective of the pension fund —

  • Valuation of Pension Assets – Legal requirements should establish a transparent basis for valuing pension fund assets. [5.1] If market valuation is not required, then market values should be disclosed. [5.2] Where valuation methodologies differ for different purposes – such as accounting versus funding – the differences should be transparent. Smoothing methods are permissible for actuarial and funding purposes. [5.3]
  • Quantitative Portfolio Limits – Maximum levels of investment allocation for particular investment categories may be prescribed to the extent consistent with prudential principles of security, profitability, and liquidity. Minimum levels should not be prescribed, except under exceptional temporary circumstances. [4.1] Where ceilings are required, a procedure for correcting excesses within specified time limits should be established. [4.3] Self-investment and investment in assets of the plan sponsor should be prohibited or strictly limited. [4.4] Foreign investments should not be prohibited. [4.6] Pension investment law should address the use of derivitives, in particular prohibiting or strictly limiting exposure to unlimited commitments. [4.7]

The OECD guidelines further encourage core principles for pension investment fund managers –

  • Prudent Person Standard – Pension trustees should be subject to fiduciary standards, making investment decisions in the best interests of plan members and beneficiaries. [2.2] When the pension trustees lack sufficient expertise to fulfill investment responsibilities, the external assistance of an expert should be sought. [2.1]
  • Identification of Investment Managers – Parties responsible for fund investment should be identified. If external investment managers are involved, an investment management agreement should be required. [3.6]
  • Investment Policy – A pension fund should actively adhere to a written statement of investment policy [3.1, 2.3] that establishes clear investment objectives consistent with the retirement income objective of the fund. [3.2] At a minimum, the investment policy should identify the fund’s strategic allocation strategy, overall performance objectives, and monitoring methods. [3.3]
  • Internal Controls – Criteria and procedures should be established for periodic review of the effectiveness of the fund’s investment policy. [3.7]
  • Risk Management – Sound risk management concepts, such as diversification and asset-liability matching, should be established. [3.4]
  • Participant Direction – Funds that permit individual investment selection should include an appropriate array of investment options, including a default option, and should ensure that participants have access to the information necessary to make sound investment decisions. [3.5]

OECD member countries are encouraged to disseminate the guidelines among pension funds and to invite their public authorities to ensure adequate regulation consistent with the recommended framework.

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