Administration August 1, 2012

Consider PBGC Premiums Before Reducing DB Contributions

August 1, 2012 (PLANSPONSOR.com) - Plan sponsors must consider the most effective ways to take action under legislation that reduces required funding for defined benefit (DB) plans but increases their insurance premiums.
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Many plan sponsors use a 24-month average of interest rates to determine the plan’s funding target and annual cost. The new law, Moving Ahead for Progress in the 21st Century Act (MAP-21) (see “Congress Passes Bill with Pension Funding Relief”), prevents the average from moving more than 10% away from a 25-year average of corporate bond rates for 2012. After 2012, the corridor widens 5% per year, eventually reaching 30% on either side of the long-term average in 2016 and later, according to Principal Financial Group.

Under the new law, the funded status of an average plan could improve by 10% or more in 2012, which would reduce the 2012 annual contribution cost. However, Mike Clark, consulting actuary at Principal, told PLANSPONSOR that this legislation will “significantly” increase Pension Benefit Guaranty Corp. (PBGC) premiums, so plan sponsors may want to continue keeping their plans well-funded by contributing more than the minimum required under the legislation (see “DB Sponsors Have Incentives to Keep Plans Well-Funded”).

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Clark explained that plan sponsors must take both components of the PBGC premiums into account before taking action:

  1. Flat-dollar premium: In 2012, single-employer defined benefit plans pay flat-rate premiums of $35 per participant with future premiums indexed for inflation. Under the new law, these premiums will increase to $49 per participant in 2014 with indexing thereafter, Clark explained.
  2. Variable-rate premium: Under the law, the PBGC variable-rate premium that is assessed on each $1,000 of unfunded vested benefits will more than double by 2015. The more unfunded liability a plan has, the more will need to be paid to the PBGC to fill the deficit resulting from plans defaulting in the past.

The increase in flat-rate premium could increase the incentive for a plan to cash out terminated participants, and the increase in variable-rate premiums could increase the incentive for a plan to avoid unfunded vested benefits, according to a bulletin from Sibson Consulting. But if plan sponsors reduce the number of participants in the plan, it will not necessarily just save the $49 rate per participant, Clark said. “The variable-rate premium needs to be considered, as well,” he added.

The law will prompt many plan sponsors to consider settling obligations to get participants out of a plan, but they must realize that settling these obligations can change the funding position of the plan, Clark said.

Plan advisers must understand how plan sponsors view this law, Clark added. Do they see it as a benefit, or as a detriment because it leads to higher long-term PBGC premiums? Before taking action, plan sponsors and advisers should discuss what option would lead to more savings.

Benefits August 1, 2012

Women Underestimate Future Health Care Costs

August 1, 2012 (PLANSPONSOR.com) - Women nearing retirement underestimate how much they will need to pay for their future health care costs, according to a Nationwide Financial survey.
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The survey conducted by Harris Interactive of 1,250 Americans with at least $250,000 in household assets found women close to retirement estimate they will spend $4,624 each year on health care beyond what Medicare covers. That’s 21% less than the $5,882 men nearing retirement estimate they will spend each year on things like premiums, copayments and deductibles. However, both are way off, Nationwide noted.   

A 2012 study by Fidelity found a 65-year-old couple retiring today would need $240,000 to cover medical expenses during their retirement years – and that doesn’t include long-term care costs.  

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According to the survey, nearly half of both women and men say they are “terrified” of what health care costs may do to their retirement plans. Yet, women respondents nearing retirement are much more likely than men respondents to say they have not estimated:  

  • How much they will spend each year in retirement on things like premiums, copayments and deductibles (41% vs. 27% of men), and; 
  • How much income in retirement they will have from things like Social Security, retirement accounts or pensions (21% vs. 12%).  

On average, women estimate that Medicare will cover 65% of their annual health care costs. But, similar to men respondents, when asked how they came to this percentage, 85% either guessed or did not know. Only 2% said they were told this by a financial adviser.   

While 65% of women have discussed their retirement with a financial adviser – of those who have, only one in 10 talked about how much they should expect to pay in health care costs apart from Medicare (compared to one in four men).   

Women are also slightly more likely than men to say they are somewhat unconfident to not at all confident in their plan to live comfortably in their retirement years (46% vs. 39%).   

To see the entire survey, visit http://www.nationwide.com/healthcare.

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