Administration November 29, 2021

The Importance of Good Data for DB Plan PRT Activities

While clean data is important for identifying deaths and locating participants and beneficiaries, it can also have a great cost benefit for plan sponsors implementing pension risk transfer activities.

Reported by


It’s important for plan sponsors to have clean data on defined benefit (DB) plan participants to help them identify and validate deaths, locate participants and beneficiaries, and manage uncashed checks, according to speakers at a webinar, “The Data Dilemma: The Impact Bad Data Has on a Pension Plan,” presented by Pension Benefit Information (PBI) Research Services and DIETRICH.

Mike Irey, director of operations at PBI Research, told webinar attendees that plans can have inaccurate or missing personal identifiable information (PII) when data in older administrative platforms does not get updated or get carried onto a new system, or when data gets input incorrectly. A PBI Research study found 5% of all participant or beneficiary data is likely inaccurate or missing.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

He said missing or inaccurate Social Security numbers can have the biggest and most severe impact, because they are often used to verify other information about a person.

“Plan sponsors can more easily clean up other data if they have the right Social Security number,” Irey said. “And to correct a Social Security number, the plan sponsor needs an accurate first and last name, date of birth and location—usually city and state.”

According to Irey, PBI Research found that having an inaccurate or missing Social Security number resulted in the highest likelihood of missing a participant’s death. “A study we did found a missing or inaccurate Social Security number resulted in 90% fewer found deaths,” he said.

Bad data can cause overpayments, added Geoff Dietrich, executive vice president at DIETRICH, especially if a plan sponsor doesn’t know a pensioner has died. He said doing regular death checks is a best practice.

It is easier to correct first and last names than other information, Irey said. He noted that the most common reason last names are wrong is an unreported marriage. “People are more likely to open communications if it has the right name on it,” Irey said.

Further explaining the importance of accurate PII, he noted that having a correct date of birth is not as big an issue when trying to locate a participant or beneficiary, but it makes verifying a death more difficult. A missing or inaccurate address is the least impactful dilemma, and the easiest to correct, he said, but a plan sponsor might have to spend extra money if an erroneous address results in multiple mailings.

Irey suggested plan sponsors use commercial databases to clean up data. Responding to an attendee question, he said about 90% of participant or beneficiary deaths are found using the Social Security Administration’s Death Master File (DMF)—and they are usually found within the first four days of death. However, Irey said the highest percentage of found deaths are through obituary searches. “We found a 0.08% error rate using the DMF, but our obituary search has a 0.05% error rate,” he said.

Clean Data for PRT Transactions

While clean data is important for identifying deaths and locating participants and beneficiaries, Dietrich told webinar attendees that his firm sees the application of data every day with pension risk transfer (PRT) activities—i.e., the offering of a lump-sum distribution window or the purchase of an annuity. “More benefits are settled via lump sums than annuities, and, with annuities, the transition to an insurance company is for the life of the benefit, so having good data is important,” he said.

When it comes to PRT activities, bad data can mean plan sponsor staff members have to spend more time cleaning up data or trying to communicate with participants and beneficiaries. It can also result in extra cost for mailings, project delays and even contract delays, Dietrich explained. “Time is money. A delay of communicating with participants can delay the contract with an insurer,” he said.

Bad data can also affect liability calculations, which are based on a participant’s date of birth and life expectancy, Dietrich added. “If you think someone is a certain age and they’re 10 years younger, a correction will come at a cost,” he said.  

Having correct participant and beneficiary addresses is important to ensure the receipt of required communications, Dietrich noted. He said a lump-sum distribution can be 10% to 40% less costly for a plan sponsor than an annuity purchase, so sponsors want to get the highest take-up rate they can because it will save the plan meaningful dollars in an annuity purchase. “If you don’t have the right address, the participant can’t take a lump sum, so you will either have to include that person in the annuitization of liabilities or hand that person over to the PBGC [Pension Benefit Guaranty Corporation],” he said.

In addition, missing or unresponsive participants will limit the number of insurance companies that will bid on a plan sponsor’s liability, resulting in less choice and potentially higher costs, Dietrich said.

Knowing participants’ locations can save plan sponsors on PRT costs another way, Dietrich explained. “Over time, insurance companies and other data miners have gotten better at estimating how long participants will live. That comes into play with the price to purchase an annuity—insurers will estimate how long they will have to insure liabilities,” he said. “Today, insurers look at life expectancy on a more granular basis using [a participant’s] ZIP code or ZIP+4. Having that data will improve the costs for annuitizing liabilities. The less information insurers have, the more conservative they will be, which will cost more for plan sponsors.”

Administration November 29, 2021

Reasons Not to Use Pension Funding Relief

Using funding relief to lower contributions to DB plans can increase PBGC premiums and get those plan sponsors that are moving toward pension risk transfer off track.

Reported by

Single-employer defined benefit (DB) plan funding relief that was part of the American Rescue Plan Act (ARPA) has been extended with the passage of the Infrastructure Investment and Jobs Act. Whereas previous funding relief allowed for a 10% “corridor” of rates on either side of a 25-year average that were permissible for discounting purposes, ARPA moved that corridor to 5% and extended it until 2025. The infrastructure bill extended it to 2030.

Brian Donohue, a partner at October Three Consulting in Chicago, says pension plan sponsors were not counting on the extended relief—and many don’t need it. In presentations to clients, Donohue says he has been stressing the need to shore up funding deficits because of the expense of Pension Benefit Guaranty Corporation (PBGC) premiums.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

“Using the funding relief will allow plan sponsors to reduce their contributions, and it might give them more room to take risks and implement settlements of pension obligations, but there is no change in the total financial obligation of the plan, or to the company balance sheet, or PBGC premiums or the cost to terminate a plan,” Donohue says. In fact, a look at his calculations used for client presentations shows that using the funding relief could increase PBGC premiums by approximately $8 million from 2021 to 2030 and would increase the cost to terminate a plan by an even greater amount.

Donohue says the breathing room is only meaningful for sponsors that have historically only contributed the minimum required amount for their plan, but most plans don’t do that.

“One of the things we’ve observed is that two-thirds of plans are fully funded on a PBGC basis, so plan sponsors have been putting in more than what the law says they have to,” he says. “If they were putting in more than the minimum before ARPA, they should keep doing that for the reasons they have been.”

Donohue says most DB plan sponsors put in more than the required minimum because the PBGC rules have become the de facto funding rules for the majority of plans; sponsors are looking at premiums when deciding what to put into their plans.

Determining what a DB plan’s funding policy will be is a complex decision that is integrated with other strategic considerations—whether that’s accounting outcomes, PBGC premiums owed or planned pension risk transfer (PRT) transactions, says Colyar Pridgen, Capital Group LDI [liability-driven investing] strategist in Los Angeles. However, he says, trying to reduce PBGC variable rate premiums is a practical reason for foregoing funding relief, as these premiums make it “painful to maintain a deficit.”

The other practical reason to forego funding relief, according to Pridgen, is that combining investment policy with a funding policy that accelerates contributions relative to the required minimums can create a smaller pension expense from an accounting standpoint. “Contributions can also be used for PRT and other initiatives,” he says. “Really the only drawback for plan sponsors to contributing to their plans exists if they have a real need for that money elsewhere.”

Pridgen adds that much of the analysis that takes place when making contribution decisions hinges on whether plan sponsors view pension contributions as more similar to an expenditure or to a debt reduction. Plan sponsors have to ask, “‘Are contributions the most profitable use for our money or is this really more of a balance sheet issue of pensions being a debt and we need to reduce that?’” he says. The latter is why Capital Group has seen an interest from plan sponsors in borrowing to fund their plans, with the PBGC variable rate premium climbing all the way to 4.8% of the plan’s deficit in 2022. “The longer plans carry a deficit, the more onerous cumulative PBGC premiums become, which creates a greater sense of urgency to fund the plan,” Pridgen says.

Pridgen notes that while in practice, the math is more complex and plan-specific, simply adding up the variable rate premium amounts for the eight years ending in 2022 exceeds 30% of the funding deficit. For the following eight years, barring legislative changes to PBGC premiums, that figure will likely substantially exceed 40%. “At some point, it becomes irrational for sponsors to maintain plan funding deficits,” he says.

In addition, Pridgen notes that borrowing costs are low for many sponsors in a historical context and that may persist or that window might close. So, from a timing standpoint, there could be some urgency in accelerating plan funding.

“There are reasons at the moment that borrowing to fund is worth a look, including that there are tax advantages to borrowing and funding,” he says. “It’s a plan-specific decision, but in a lot of cases, it could make sense.”

It makes sense for severely underfunded plans to use the funding relief because they are already at the PBGC premium cap—if their plans become more underfunded, premiums don’t increase, Donohue says. But, for moderately funded plans, it would be a mistake to use the relief “because premiums would go through the roof,” he explains.

Sponsors with plans that are frozen and moving toward PRT or termination should also not use the relief because putting more funding into their plan is helping them get out from under it, he adds.

The ultimate reason DB plan sponsors should continue to make progress on funding their plans is that they made a promise to participants and they have to fulfill this promise, says Donohue. “It’s like a forbearance on your mortgage. Even if it’s allowed, it’s not necessarily a good idea because you will owe more later or won’t be able to pay your obligation,” he says.

Overfunded, mildly underfunded and severely underfunded plans face different strategic considerations, Pridgen says, adding that many plan sponsors are facing a different set of problems than they were one year ago by virtue of being at a different funded status and, therefore, subject to different PBGC premiums.

«