Blogging Employee Benefits

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.


January 6, 2006

Simply Stochastic

Filed under: Actuarial — Fuguerre @ 7:04 pm

Roll Model: Simulating a Savings Plan Account Balance in the January/February 2006 issue of Contingencies presents a relatively simple explanation of stochastic modelling of economic processes, in this particular instance with an eye toward the stochastic modelling being conducted by actuaries of the Social Security system. Whether or not the straightforward probabilistic approach used by far too many whizbang stochastic models truly give any better decision-making insight into something as complex as the Social Security system is never adequately addressed in the article. OK, yeah, the article had tight space constraints and needed to steer clear of arcane actuarial jargon so as to reach the more common audience that Contingencies pitches. Even so, it would not have taken more than a quick paragraph or two to focus on the difference between stochastic processes that have no dependency on time or on previous events or choices, versus those where the probability distribution function at time t+1 differs from that present at time t depending on the passage of time, the particular environment produced by the probabilities present at that prior time, and the choices made. So a stochastic Monte Carlo simulation of production over a short period (i.e., so wear and tear can be ignored for this exercise) of a widget with a relative stable, time-independent probability distribution function and a mechanical process that does not change the probabilities applied to the next widget depending on what had been done for the last widget differs quite conceptually and practically from a stochastic simulation of something like the interest rate climate, when too many blindly ignorant supposedly sophisticated models would continue to make the computer shirp merrily away spitting out some scenarios in the mix that blithely ignore that the system has produced negative interest rates with exactly the same future possibilities at hand as for the scenarios with ultra-high inflation-climate interest rates, worse yet with precisely the same blind responses by the investor or pension plan sponsor seen under either of those two extreme scenarios produced by the model. They seem to figure that as long as they average enough millions of scenarios, the fantasy behind any single one of those scenarios – even those not at the extreme – can be ignored.

And that’s not even to mention that far too many of these models use probability distribution functions that presume independence that does not exist in the thing being modeled, on top of a particular type of distribution function that does not reflect the reality of the thing. Like interest rate futures beyond perhaps a moment into the future can truly be modeled using a normal curve?

Since the article itself does admit that it does not speak directly to the particular stochastic methodologies in use by the Social Security Administration itself, it’s impossible to use that article as a springboard for any appraisal at all of the very development that seems to have led to the article. Leaving me completely in the dark as to what the article was attempting to communicate. If nothing beyond a mere glance at the simplest side of stochastic modeling, then I find that as dangerous as the pile of hotly marketed but quite poorly designed stochastic models building up around pension plans and other financial instruments like a cloud of thick smoke and a pile of smudged mirrors. Too many already have run those simple stochastic models for their financial instruments thinking that magic words like Monte Carlo get them something more meaningful than the supposedly rigid deterministic lines that might have served them better in the end.

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