Administration February 5, 2015

Corporate Pension Deficits in January Highest Since 2012

The funded status of pension plans of S&P 1500 companies fell 5% in January.
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The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies decreased from 79% as of December 31, 2014, to 74% as of January 31, 2015, according to Mercer.

Sharp decreases in interest rates used to calculate corporate pension plan liabilities, coupled with losses in equity markets, brought funded status down by 5%. Gains in the fixed-income market were not enough to offset increases in liabilities. The estimated aggregate deficit of $654 billion as of January 31 increased $150 billion from $504 billion at the end of 2014—reaching the highest level since 2012, Mercer says.

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The S&P 500 price index decreased by 3.1% in January, while MSCI EAFE index increased by 0.4%. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 48 basis points to 3.33%.           

“Not the start to the year that plan sponsors were hoping to see,” says Jim Ritchie, a principal in Mercer’s retirement business.  “After a 9% drop on average in 2014, sponsors are hit with a further 5% drop right out of the gate in 2015. The continued volatility in fixed income and equity markets, as well as the expected improvements in mortality, together make risk transfers a more attractive strategy in 2015. While many plan sponsors settled their liabilities with former vested employees in 2014, more will likely consider settling their liabilities with active employees and retirees in 2015. There is an unprecedented opportunity in 2015 for many plan sponsors to terminate their pension plans at a discount to accounting liabilities.”

According to Mercer, the estimated aggregate value of pension plan assets of the S&P 1500 companies as of December 31, 2014, was $1.89 trillion, compared with estimated aggregate liabilities of $2.39 trillion. Allowing for changes in financial markets through January 31, 2015, changes to the S&P 1500 constituents, and newly released financial disclosures, at the end of January the estimated aggregate assets were $1.90 trillion, compared with the estimated aggregate liabilities of $2.55 trillion.

Compliance February 5, 2015

Beneficiary Designation Forms Not Governing Plan Documents

An employer’s retirement plan documents did not incorporate beneficiary designation forms in its language or appendices, so the forms did not govern the award of benefits, a court ruled.
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A federal appellate court found that beneficiary designation forms were not ‘plan documents’ governing a plan administrator’s award of benefits upon a retirement plan participant’s death.

Since the forms were not governing plan documents under the Employee Retirement Income Security Act (ERISA), the 9th U.S. Circuit Court of Appeals said the issue of whether the participant substantially complied with the governing plan documents to designate his beneficiary is an inquiry under state law. The court found a reasonable trier of fact could determine that he did. The case was remanded back to the district court for further proceedings.

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A participant in two Xerox benefit plans designated his wife on beneficiary designation forms as the beneficiary of his accounts. After he and his wife divorced, he designated his son during a phone call with the Xerox Benefits Center as beneficiary. Xerox sent him beneficiary designation forms asking him to confirm his selection of his son as beneficiary, but he did not sign and return the forms.

The appellate court noted that the plan documents and summary plan descriptions (SPDs) do not reference the beneficiary designation forms as necessary to designate a beneficiary. The documents also say a participant may visit the benefits website or call the Xerox Benefits Center to complete or change beneficiary designations at any time.

The 9th Circuit cited previous cases which found that only documents that “provide information as to where the participant stands with respect to the plan” such as an SPD or trust agreement, could qualify as governing documents with which a plan administrator must comply when awarding benefits. The court said that because the beneficiary designation forms provide no such information, they are not “plan documents” governing the plan administrator’s award of benefits.

In addition, the appellate court found the actual plan documents do not incorporate the beneficiary designation forms in its language or appendices so as to bring them into the category of governing plan documents. The 9th Circuit said the district court erred in determining that the participant was required to abide by the language contained in the forms, but not the governing plan documents, to change his beneficiary designation.

The ex-wife argued that Xerox had discretion to require the use of the beneficiary designation forms to change beneficiaries. But the appellate court found that Xerox did not exercise any discretion in requiring the forms because rather than award the benefits to the ex-wife per the forms on file, it chose to go to the court for a determination.

The 9th Circuit’s decision in Mays-Williams v. Williams is here.

 

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