SOA Funding Relief

7/30/2019 SOA Funding Relief

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2

ProPosed Pension Funding stabilization

Ppsed Pesi Fdi Sabiizai: H Des I Aehe Sie-Empe Defed Beef Ssem?

MAjor FInDIngS: th P F s pv h s p vy

p p v h x v y, h -

2012 y q y.

iy, q y h

(ppxy 43 p 2012), h xp h y

y x h h hv q .

th py q h pv h h

pv h , h pv

-- vy ky v

h .

th p k k- h v y. F

xp, 2013 2014 ky y y y v.

th vy p h h ,

vy h v xp .

ExEcutIvE SuMMAry

i h, h p h ky kh h

pv, -py (db) y. F p-

h u.s. c h h h p h pp -

h p p. o pp h h s-p

mv ah P h 21 cy (maP-21) (s. 1813), h h

P F s. th pv h h p h p ,1 hy f h

p .

th p pv y h h pv h maP-21

hv h pv, -py db y h, h

v p p. th p pph h y h ppv v ky p-

p h : h py p , h vy h y,

h y py q. wh p h y

py q, h y v h h p vy

q.

b h pv h y h - p , hy h h p h P P

2012 Sie Aaies. Shamb, Iiis

1 The permissible range o interest rates would be based on the 25-year historical average o corporate bond yields. In 2012, the per-

missible range would be within 10 percent o the 25-year average. The range would expand by 5 percent (above and below) each

year, until the permissible range would constrain rates to be within 30 percent o the 25-year average or valuations in 2016. It would

then remain constant or all subsequent years.


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3


a 2006 (PPa)h p y k k . th y

h h h pv vy p p v h x v

y, q y qy h h y ,

y, hy x h v q .

b p v y, h k

v hv p q-

h y. n- vy, h h h ky hh, q h

y, hy y h pv. a , h pv hv y

h py q h h , , h

h h p y h pv, h pv hv

py h .

th h y pv v h kh h -py db p

y. wh h pv h maP-21 hv h , h

q vy v, hy vy

, h h vy q. r q

pv db p p h h fxy v h . Hv, hy

p q h q, hh y x q . th, h h h

- q .

EFFEct on vAluAtIon IntErESt rAtES

u h h pv h p -

h q x. wh xp,2 h pp

h v h p pp. t

h x h v , p p ,

q. lk, h v , p .


2 Sponsors currently have the option to value their DB obligations using either a smoothed, segmented yield curve or the current, ull

yield curve. The proposed legislation would only aect the smoothed, segmented yield curve. This is urther described later in this

section.


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4

t 1 h h pv v ,3 -

h h p v ph y h irs h 2012. b-

h 25-y v h hh v y , h

pp h s ppy y p p,

h v 5.37 p 6.73 p 2012. th, h p

h 25-y v h vy hh h

h 25-y hy p y h y, h , y, v h v v .

tabe 1

t 2 x h h pp v , hh p v 2012 ( t 1). t 2 h

kh4 h h v h h

v. rvy hh h h 25-y h

p pv hh y h h pv h v h

y y h pj. a h hh h ph , h

kh h hv h pp .

tabe 2



Year Increases rate no change Lowers rate

2012 100% 0% 0%

2013 100% 0% 0%

2014 100% 0% 0%

2015 90% 10% 0%2016 44% 53% 3%

: : : :

2021 29% 50% 21%

: : : :

2026 27% 52% 21%

vAluAtIon yEAr 2011 2012 2013 2014 2015 2016 2017

currEnt lAw IntErESt

rAtE

5.88% 5.37% 4.94% 4.68% 4.68% 4.68% 4.68%

SEnAtE BIll IntErESt

rAtE5.88% 6.73% 6.18% 5.66% 5.16% 4.81% 4.75%

IncrEASE NA 1.36% 1.24% 0.98% 0.48% 0.13% 0.07%

3 Throughout this report, a single, level-equivalent interest rate is used to summarize the spot rate curves that are used in actual

valuations.4 Most o the analysis in this report is based on 500 real-world simulations o uture economic and market variables provided by Barrie

and Hibbert, a Moodys Analytics Company that specializes in the modeling o these variables. Tables 2 and 3 are based on the

projected corporate spot curves included in these simulations and are thereore consistent with the other exhibits provided in this

report. Percentages shown reect the number o aected outcomes out o the 500 scenarios or each specifed year.


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t 3 xp t 2 y h h p hh h pp

h h v-qv y h 25 p, v .

th h h v y p, hh hv

h . t 3 pv h kh h h

pv hv . 5 cp t 2

3, h hh h h h pv v ,

h kh h p. i , h 25 p h h , h ky h h v h

. m , hv, h vy hh kh h y

y h . i, h 500 h y, h -

pv h s vy p h v

2012 2013, php .

tabe 3

a v, h pv v p -

h p h (-h) y v. db p p y -

p h , y v, pp h h, v,

hh -y h pp. rvy p h y vy,6 y h v . i h , hv, h h h -

pv v , hy h p h

h y v, k h v h h pv.

th, h pp v h h .

EFFEct on contrIButIon rEquIrEMEntS

a v, h pv s.1813 h

p h x v y, hh v

ky v h . th p f hh h

q y y h -

qy v h h v hy .

5



Year Increases rate more

than 25bp

Less than 25bp

change

Lowers rate more

than 25bp

2012 100% 0% 0%

2013 100% 0% 0%

2014 97% 3% 0%

2015 48% 52% 0%2016 15% 85% 0%

: : : :

2021 14% 81% 5%

: : : :

2026 12% 83% 5%

5 The eect o a 25 basis point change will vary signifcantly rom plan to plan, as numerous other variables come into the equation.

However, a conventional rule estimates that a 25 basis point change would cause a 2 to 4 percent change in calculated pension ob-

ligations. It should be noted, too, that the existence o unded thresholds, such as those at 60 percent, 80 percent and 100 percent,

could make very small changes in the valuation interest rate meaningul to aected sponsors and participants.6 O the more than 8,500 2010 5500 flings in our database as o March 2012, a little more than 1 percent o the flings indicated use

o the ull yield curve.


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exh 1 h h pv pj q

h -py db y.7 a h pv p, The Rising Tide of Pension Con-

tributions, q xp h

h v p pv . 8 th hh

y h pp q y, h -

v k v, q . c q h pv vy x q , y,

h p k p

h y. i , h pv q y h

k h v ( y h ) k v.

Ehibi 1

EFFEct on tHE PrEDIctABIlIty oF FunDIng rEquIrEMEntS

skh h pv db y h h y py

q. s, p q h p db p

y h y h p. th y py p 9

hp p v h q hh, hh hv v

h q h h pp v.10

6



7 For clarity, Exhibit 1 displays only median levels or each projection year. Among the 500 scenarios, aggregate contribution levels

varied rom $0 to more than $250 billion over the projection period. Exhibit 2 provides more inormation about the range o contri-

bution requirements.8 However, unding requirements are expected to be greater than shown in the Rising Tide report, reecting plan experience during

2011.9 Generally, plan assets divided by plan obligations.10As an example, plans that all below the 80 percent unded threshold are subject to additional contribution requirements and may

suer restrictions on the orms o distributions participants are eligible to receive.

0

20

40

60

80

100

120

140

160

180

200

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

$Billions,

Inflation-Adjusted

Aggregate Contribution Requirements

Current law

Senate bill


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7

exh 2 h h pv h vy

q y h 10h hh 90h p h h

exh 1. a ( ) p

q. th h h xh h h 10h hh 90h p

q h y. th pp pv hv h p-

y q, py 2016 2018, h y p ky p h 100 p hh .11 nh,

vy h pp pv. th xp y

vy h h pv , h h -

ky hh.12

exh 2 pv y h h pp h py -

q, h p, h v



2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

currEntlAw

2 30 72 129 189 230 243 223 210 209 219 230

SEnAtE BIll 1 25 69 101 141 170 200 238 234 220 213 211

Di b 10 d 90 il ii qi ($billi, ifi djd):

11Passing this threshold adds to volatility by reducing the contribution requirement to zero, oten a signifcant drop.12 In addition to the aorementioned thresholds at 80 percent and 100 percent, the 60 percent threshold may orce the plan to cease

additional beneft accruals, reducing contribution requirements and the benefts that participants receive.

0

50

100

150

200

250

300

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

$Bilions,

Inflation-Adjuste

d

Volatility of Aggregate Contribution Requirements

Current law

Senate bill

Ehibi 2

currentlaw

Senatebill

90h Peeie

10h Peeie

Media

Di b 10 d 90 il ii qi ($billi, Ifi-adjd)


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p. exh 3 h h pv h q

pv p,13 h h p py. th p py -

y py, v v v v-

v py. th y py h pv p pp vy h h y h. Hv, hh h, v h pj

p, q 11 p 16 p py

v 0 p 18 p h pp pv. s h

h s pv py h h h , p

pvy h h hy h f.

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

currEntlAw

0% 3% 7% 12% 20% 25% 25% 23% 22% 22% 23% 24%

SEnAtE BIll 0% 3% 5% 10% 14% 18% 21% 27% 25% 24% 23% 23%

0%

5%

10%

15%

20%

25%

30%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

RequiredContribution(%o

fpay)

Volatility of Contribution Requirements for a Representative Plan

Current law

Senate bill

Di b 10 d 90 il ii (% y)

13Our hypothetical plan was 92 percent unded at the beginning o 2011, and would have had a minimum required contribution equal

to 6.1 percent o pay or 2011. At the beginning o 2012, the unded status would be 87 percent under current law and 103 percent

under the proposed unding stabilization provisions.

Ehibi 3

currentlaw

Senatebill

90h Peeie

10h Peeie

Media


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9

exh 4 h p h h pv p, hh -

p h hp h ky PPa hh 60 p, 80 p

100 p. th v hp exh 3 4 h x -

, q . u h s pp, xp h

yp p p py, h v 14

v 15 v h x v y, hh y y k h y h

q v h v y h . u h p h p x h q, h k h h p

h 80 p hh, q p -

. Fy, h v h h pv hv

h h py h h p.

60%

70%

80%

90%

100%

110%

120%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Funded

Status

Volatility of Funded Status for a Representative Plan

Current law

Senate bill



2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

currEntlAw

0% 8% 15% 22% 26% 28% 28% 29% 30% 32% 31% 32%

SEnAtE BIll 0% 11% 15% 21% 25% 27% 26% 27% 26% 27% 28% 28%

Di b 10 d 90 il dd :

14See discussion o Table 1.15A loss occurs when obligations increase more than the valuation assumptions assume. Thus, a pattern o declining interest rates,

which increase calculated obligations, causes losses.

Ehibi 4

currentlaw

Senatebill

90h Peeie

10h Peeie

Media


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10



EFFEct on tHE trAnSPArEncy oF FunDED StAtuSES

u , h ky h -py db p .

PPa h p , v k h h

v . th p q

pvy h p. m y, hh, h pv

p , y k h p db p k y h p.

exh 5 p h - h y pp h 2012

h h p p v ph y h irs, h h

, h - h ppy h pp .

th ph h h p -py db hv h

p h h v v .

a h exh 5, h pv hv h

p 2012. u y , h p

60 p 2012. Hv, p pp h ky .

i p, 62 p 80 p

v , 92 p h v h pp . a h v p h 15

p 2012 v 100 p , h pp h

h 40 p y k y p . m h

h p h hp h k

, h h pp h, y k , p

y hh.

PErcEntAgE oF oBlIgAtIon FunDED to: 60% 80% 100%

cpae aes (4.7% eiae) 96% 34% 4%

ce a aes (5.4% eiae) 98% 62% 14%

Seae bi aes (6.7% eiae) 99% 92% 41%

0%

20%

40%

60%

80%

100%

50% 60% 70% 80% 90% 100% 110% 120%

PercentageofObligation

Funded Status

Funded Status of Obligations under Alternative Interest Rates in 2012

Senate bill rates

Current law rates

Corporate rates

Ehibi 5


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11

th p h s x-

p p p h py h h v

h . Hv, h ,

y k k , k h p y p y

v qky h h pp . th

v 2013, h h v h pp vy p,

hhy ky 2014, h h y h y h h v h . th, h pp , h p

2012 hh 2015 y p h k

h y.

EFFEct on tHE SolvEncy oF PlAnS

e h vy p p, h y h , -

. a pvy, h pv

hv h q h . i h, ,

vy y, h vy h v hv

.




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12



exh 6 p h pj v h -py db y

h pv. F pp h , h p

p a- p , h h -

p h v p .16 a xp, h ph h h v

y h pv h v p

h .

th h k v h h . sp-

y, h x p h p, h h P- b gy cp (hh, hy, hh p

p) pp . t 4 h h v

h s h y h pj. th pv h -

h k h pp. th x $100

x y (2014 2019), v p

h . nh, hy h v y py

p y h pp .

tabe 4

60%

65%

70%

75%

80%

85%

90%

95%

100%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

PercentofObligationFunded

Projected Funded Levels on a Market Basis

Current law

Senate bill

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

currEntlAw

1.90 1.92 1.98 2.07 2.17 2.25 2.30 2.39 2.43 2.46 2.52 2.60

SEnAtE BIll 1.90 1.89 1.87 1.92 2.00 2.09 2.18 2.26 2.34 2.41 2.48 2.54DIFFErEncE 0.00 0.03 0.11 0.15 0.17 0.16 0.12 0.13 0.09 0.05 0.04 0.06

Ehibi 6

16Solvency obligations are more commonly based on U.S. Treasury yields or the cost o buying annuity contracts, which would have

the eect o lowering unded levels under both the unding stabilization provisions and current law. These assumptions reect the

certainty o payments at the time obligations are settled. For simplicity, this analysis did not consider the eects o plan deault and,

thereore, uses corporate yields as a proxy to illustrate the eect o the unding stabilization provisions on solvency.

currentlaw

Senatebill

90h Peeie

10h Peeie

Media


13/17

IMPlIcAtIonS For PlAn SPonSorS AnD rEgulAtorS

Pyk v h y h h pp

h . F, y h h, h h h h h

pv hv p , h y py. th,

h h h y x h . d h p

h h pv xp hv , hy q-

v , p h p h p. Hv, hy

hv x h vy q, py h

q h y hy pv h py h q-

. i p p k v h p q y x

q, hy y h q. Hv, -

- vy h q pv p-

y h h v . a p, h h h pv

hv p h h v q, hy h -

h h p p .

sh h pv , p p x

p h p, k h v

h y h 2012 . th pv

h h f p; hv, h x , h k

ky hh hp hk q . Fy,

p h xp vy h q, h

x hy xp - k.

concluSIon

s h pv h s-p maP-21 -

h hh y. th pv vy p

v v h x v y, hpy 2012, py

v h x . th p pp hh f

q , p p , . thh q f, hy h y, pv p p

h p fxy h h . Hv, h

h py p p q p .

l h h pv hv ,

h h h k f. iy, v h

, h pv pv h vy q. oh,

-v-- vy h h pv py

h h , h kh h h pv v

h h h v. i x h p vy

, , h x y q , hy ky

q h .




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14



APPEnDIx: MEtHoDS AnD ASSuMPtIonS

th h p v 500- h pj h pv -

u.s. -py db y, h h h h

pv h mv ah P h 21 cy (maP-21) (s.1813)

ky pp . th pj vp h P

i m sy (Pims), hh y h P b gy

cp (Pbgc). s h py v y , Pims h

ph xp 425 -py db p, p h

h h p p y h Pbgc, p

y h sy a (soa). i h p v h p h y

h pj p h , v q

h p h p. th h p 425 p h xp h

-py v p, h h h p.

i h pj, h pp y h Pbgc o 2011,

hh py v F 5500 y db p p-

. th p ph, ,

v, p 425 p p. wh vy h

y h , h pp v y -

y. th soa p h j v (h p

) o 2011.


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Pims p v xp. a -

ph p , hy h

hh 500 . Ky p h y :

VaLuatIon experIence

DEMOGRAPHIC

ACTIvE HEADCOUNT Cosed group Constant for ongoing pansTERMINATION RATES As discosed on Schedue SB As discosed on Schedue SB

DISABIlITy RATES As discosed on Schedue SB As discosed on Schedue SB

RETIREMENT RATES As discosed on Schedue SB As discosed on Schedue SB

MORTAlITy RATES

(PRE- AND POST-RETIREMENT)

RP2000 projected 10 ears be-

ond the auation date, assuming

60/40 mae/femae popuation

RP2000 projected to the auation

date, assuming 60/40 mae/femae

popuation

ECONOMIC

EFFECTIvE INTEREST RATE

2010 5.74%

2011 5.51%

2012 4.71%ASSET RETURN

2009 16.84%

2010 12.86%

2011 0.70%

ASSET AllOCATION

Domestic equit 35%

Internationa equit 17%

Inestment grade debt 36%

High ied debt 5%

Rea estate 4%

Cash 3%

WAGE INCREASES

(PAy-RElATED PlANS)

1.00% pus a merit increase de-

ried from participant data

BENEFIT INCREASES

(NON-PAy-RElATED PlANS)

NONE


Ky h p h p p v, ,

, f. b H, my ay cpy h p

p , pv h soa h 500 -

p p v, f. (th soa hk b H h

.) a f, pvy h,

h py- p.

n kp p h h pj p. th v p

h y J 30 p h x y. a pp

y py.

wh h p PPa , q

h pv h PPa 2006, hh h P r a 2010

(Pra). P h h p h v h Pra -


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h . th h p 24-h

h . th h v (aVa) q h -

k v (mVa) h v q h sh sb ; h,

24-h h h mVa h aVa.

wh h p h s ( h pv

h maP-21 ), h q k h P F s pv s 40312 h mv ah P

h 21 cy (maP-21) (s.1813). spy, h x h 24-h v

PPa hv h v h

p y h pv, hy x (pvy) h .

th y ppy h pp p p y h h v-

h 25 y sp. 30 h y p h v y. H-

h Hh Qy mk-wh (HQm) p y

v ph y h dp h ty o 2003 hh d 2011, h

cp P d cv sp 1995 hh sp 2003, ty

j p p p sp 1995.

u h h p, p h h q pp h v . a

h x v h x h q-

. a h f ( h p y py h p

y) h h p y.

t h v -py db p h u s, h

h p h p p y p 2009

( ) h v h p. P h p, h p h

p y h h p p (326

p h 425 p h p). th p h h y y

p h h y h y h y h

p y h v.


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s o c I e t Y o a c t u a r I e s475 n. m r, s 600

sh, i 60173www.soa.org

th p v p h p . rh, h pp

h h py pv jv, y h p p h h q p p. wh hp h h y hp

py k p h pp , h y h

hy h v h h , h h y, h

v , h p p p, h . cqy, h sy a

k y p h h hh h h p.

SOA Funding Relief

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