In
our introductory article last week, “De-risking corporate defined benefitpension plans,” we stated that the current, relatively well-funded status of DB plans presents
an opportunity to lower the risk level. It’s important to recognize that the
risks involved cover a full spectrum that extends well beyond the problems that
result from underfunding. This article explains the six major types of risk
that plan sponsors face.
Investment risk has been making its
presence felt since 2000 and, until recently, equity returns have been lower
than both historical averages and plan sponsor expectations. Interest rates
have lingered at or near record lows. Volatility has been high at times, with
extreme “tail-risk” events coming with unusual frequency. And increasingly high
correlations between asset classes have left investors with no safe place to
hide.
During
the great recession of 2008, all asset classes declined together. Diversification,
the traditional primary tool for managing investment risk, failed to protect
investments from significant declines. As a result, plan sponsors face great
uncertainty over how much of their pension liabilities can be funded in the
future from investment returns; they face the alternative of using the
corporation’s operating cash to maintain or improve their plans’ funded status.
Interest rate risk really came to light
because of the declines in interest rates since 2008, reaching historic lows in
2012. The calculation of the value of pension liabilities is similar to bonds,
with present values increasing when interest rates decline. In addition, the
Pension Protection Act of 2006 (PPA) imposes strict funding schedules and heavy
penalties for plans that are significantly underfunded. By an unhappy
coincidence, PPA technical calculations went into effect in the same year
(2008) that the great recession led to the collapse of financial markets and
pension asset values. While remedial legislation passed by Congress relieved
some of the pressure on these cash funding requirements, GAAP (generally accepted
accounting principles) accounting rules still require pension liabilities to be
“marked to market” using current interest rates. This means plan sponsors are
still dealing with high pension liabilities on their balance sheets and an
extremely complex regulatory environment. Bottom line: Interest rate risk is
still a major source of uncertainty.
Longevity risk is becoming more of an issue for pension plans
as retirees enjoy longer life expectancies. Mortality tables that use
projection scales are required by both auditors and the PPA. Specifically, the
Internal Revenue Service (IRS) mandated the use of mortality tables with
projection scale AA as part of the PPA. The Society of Actuaries continues to update
its recommended scales on a regular basis. In the near future, we may
transition to table “MP-2014,” a unique two-dimensional table that takes into
account both age and calendar year of death. Depending on actuarial
assumptions, participant age, and gender, this could result in liabilities that
are significantly higher than under current mortality table assumptions.
Legislative and
regulatory risk
can be summarized succinctly: Pension complexity and, in turn, fees are likely
to increase. The PPA turned the pension fund world upside down with its
application in 2008 as liabilities were measured on a “mark to market” basis
and asset smoothing was limited. Coming at the end of that year, the great
recession created the need for statutory funding relief and the result was the
Moving Ahead for Progress in the 21st Century Act (MAP-21) legislation. Until
MAP-21, interest rates smoothing was only allowed for a maximum period of 24
months.
While
bringing some cash funding relief for plan sponsors, MAP-21 also increased the
insurance premiums that are paid by plan sponsors to the Pension Benefit
Guaranty Corporation (PBGC). Moreover, with the November 2013 budget accord,
even higher PBGC premiums have been etched into pension law for the next
several years. The higher premiums produce more for the federal budget even
though they are unrelated to federal spending, attracting legislators looking
for ways to fund increased spending. With PBGC officials constantly speaking
about their need for more revenue, the real dollar cost for plan sponsors with
underfunded plans will almost certainly increase in the future.
Administrative risk stems from the
possibility of litigation over plan interpretation and plan administration. One
nettlesome issue is late retirements. Here, plan sponsors are at risk over
suspensions of benefits, mandatory commencements at age 70.5, and potential
Voluntary Correction Program (VCP) issues. A second area fraught with hazards
falls under the Defense of Marriage Act’s extension of benefits for same-sex
spouses. A third danger zone focuses around lump sum offerings, where problems
can arise over potential discrimination, subsidies, anti-selection, and
liquidity issues.
Clearly,
pension plan administration is complicated, and our society is litigious.
That’s a volatile combination, which can prove costly to pension funds. As a
result, many companies have looked to outsource their pension administration to
third parties, a trend that will probably continue in the future.
Other demographic
risk
refers to any adverse unexpected experience among the participant population
(other than longevity risk, already referenced above). Since the great
recession, there has been a significant increase in disability claims and
terminations. While the overall trend is toward delayed retirement, many
participants who were laid off during the recession and couldn’t find
reemployment have opted to commence their pension benefits early. There is also
embedded anti-selection risk in plans where participants have the option to
choose from various subsidized benefit forms.
Discussing
and evaluating these six types of risk are the key first step in any de-risking
process. Next week we’ll explain some of the major strategies plan sponsors can
employ to address the fund’s assets, liabilities, and funded status.
John Ehrhardt and
Zorast Wadia, principals and consulting actuaries with Milliman in New York
NOTE: This feature
is to provide general information only, does not constitute legal
advice, and cannot be used or substituted for legal or tax advice.
Any opinions of the author(s) do not necessarily
reflect the stance of Asset International or its affiliates.
Electronic
books and magazines have not surpassed those in print as the preference for
responding readers. More than six in ten (63.3%) said they prefer to read books
in print, while 36.7% said they prefer to read books electronically. Nearly all
(93.4%) of responding readers prefer to read magazines in print, with only 6.6%
saying they prefer to read magazines electronically.
Nearly
one-third (32.3%) of respondents indicated they have purchased more than 20
books in the past year, either in print or electronically. Eight percent said
they have purchased none, 21.8% have purchased one to five, 20.2% have
purchased six to 10, 9.7% purchased 11 to 15, and 8.1% purchased 16 to 20.
More
than six in ten (61.3%) responding NewsDash readers have purchased or
subscribed to one to five magazines in the past year, while 16.1% have purchased
or subscribed to none, and 12.1% have purchased or subscribed to six to 10.
Only 3.2% each indicated they have purchased or subscribed to 11 to 15 or 16 to
20 magazines in the past year, and 4% purchased or subscribed to more than 20.
In
the past month 62.9% of respondents read one to five books, 13.7% read none,
14.5% read six to 10, 8.1% read more than 10, and 0.8% said they don’t know how
many books they read in the past month. Three-quarters of respondents read one
to five magazines in the past month, 8.9% read none, 11.3% read six to 10, and
4.8% read more than 10.
Nearly
four in ten (37.7%) of responding readers indicated they normally read books
all in print, while 9.8% said they read them all electronically. Nineteen
percent read mostly in print, 22% read mostly electronically, and 11.5% said
they read equally in print and electronically. Sixty percent read magazines all
in print, while 32% read mostly in print, 3.3% read mostly electronically and
4.9% read magazines equally in print and electronically.
In verbatim comments,
print also came out as the most preferred method of reading; also, for those
who like to fill out puzzles, print works best. However, many touted the
convenience of being able to read electronically, especially when travelling. A
few readers are advocates of the public library, especially for those who read
a lot and for whom buying books can get expensive, and a few touted a method of
“reading” the survey didn’t cover—audiobooks. I thought it might be
embarrassing to admit that the first thing I do when I get a book or magazine
in my hand is smell it, but apparently, I’m not the only one. Editors’ Choice goes to the reader who
said: “If they invent an e-reader that can emit the smell of pages bound in
leather, I’ll make the switch.”
Verbatim
Love
to read. Also love to donate books that I end up not loving -- so print works
better for me overall. I haven't found a way to deduct a donated ebook....
Old
school - I prefer to read paper. That said, I love my Kindle and Kindle app on
my iPad, for traveling, and while waiting in lines, or waiting for people. Very
convenient.
Although
there are many advantages to reading on a tablet I still enjoy reading an
actual magazine or book. Once our current laptop dies I would expect we will
get a tablet and begin the transition.
Reading
on kindle is great for long heavy books, also great for travel. But I do find a
book more pleasurable, when it's convenient.
My
first choice is in print, but electronic media is much more convenient when
travelling.
God
bless the public library.
Although
I have some books downloaded to my iPhone and have a magazine that I receive in
both print and electronic form, the iPhone is strictly for when I have some
dead time and no real books or magazines at hand. Nothing replaces the look,
feel and smell of a real print book.
I
find that magazines are difficult to read electronically. Also, if there are
crossword puzzles or Sudoku or other games where you would fill in a space,
you're out of luck with electronic versions that usually don't have fillable
fields.
I
was an avid reader - until I went back to school for a graduate degree. I had
to read everything for content and meaning, and unfortunately that took most of
my love of reading away. After 5 years, I finally miss reading and am trying to
learn how to read for pleasure again.
I
love having my Nook, especially when I am travelling. But, I still find great
joy and comfort in a trip to the library to pick up books. Since I read
voraciously, cost is a really, really big factor for me, and reading from the
library gives me a huge selection and is free!
I am addicted to
reading; I will read nutrition labels if there is nothing else available. Of
course, I don't enjoy them much! I expected my Kindle Fire would change my
life, and while I do still love, feed and use it - there is something so
satisfying about holding a real published paper book in my hands that I am glad
both are still available. I'm also a bit of a pack rat. Collecting books is
fairly acceptable, but hanging on to magazines gets untidy fast, and proper
archiving has always escaped me. Best to do the magazines and newsletters
online.
Verbatim
(cont.)
I
have had my mini iPad for 18 months and have been electronically reading at
least one book a week - all checked out from my local library in the comfort of
my home. My train commute to work is reading and listening to my music all on
my iPad - LOVE IT! Will be retiring in less than 2 years so looking forward to
reading even more, as I lounge on my patio. Woo Hoo!
Since
I've gotten my electronic reader, it never leaves my side, and I always have
something to read when waiting -- and sometime while watching TV.
The
only thing I don't like about ebooks is the inability to share them. I like
having a choice of reading materials without having to carry a lot of books
around.
Have
3 readers in the house (two people doing the reading) 2 B&W 1 Color. Prefer
the B&W for books color for magazines (pictures). Still prefer the paper
magazines but love electronic books - borrow from the library.
Even
though you didn't ask, I also prefer reading the daily newspaper in print. It's
harder to share the paper with my spouse when it's electronic, and I am
addicted to the daily puzzles (Jumble, Crossword, and Sudoku). Hard to do them
online.
I
haven't purchased any books but I borrow electronic books from the library
every week. Listening to a book makes my daily commute a much more enjoyable
experience.
Do
do much reading of books electronically, so don't really know my preference.
I
get most of my books from the library. I'm a fast reader and reading book in
print is much easier. The screen is too small on electronic readers and I'm
constantly flipping pages. I read newspapers both in print and online however.
Many
libraries now allow ebooks to be checked out instead of purchased, which is
really nice! I also "read" a lot of audio books, but I'm not sure if
that counts!
I
love being able to purchase a book on line and be able to start reading. Works
great for evening reading.
When e-readers came
out, I scoffed at the lack of tactile part of the reading experience. Then I
downloaded the nook app on my tablet, and quickly determined the convenience of
e-reader is outstanding, especially for travel.
Verbatim
(cont.)
I
have two library cards and am a frequent borrower. I love my e-reader for
travel and ease of transport. I nearly always have a book with me in some form
and listen to a book on tape during my daily commute.
I
think the causality works this way: if you read a lot, ebooks are a very
convenient way to feed the addiction: There's nothing like the rush of getting
a new book in less than a minute at 3 am.
First
of all, I do read NewsDash faithfully. I have not been reading much of anything
else lately, but doesn't stop me from buying! I'm retiring at the end of June,
so I'll catch up then (along with my sleep). And, I subscribe to NewsDash
personally, so will continue to read that.
I
love my e-reader! I don't have to plan ahead when traveling; I always have a
book and a choice of books. Plus I have the ability to buy a new book even when
I am far from the nearest book store. But I do worry about what will happen to
my "library" when the electro-magnetic pulse happens and all our
electronic devices stop working... Then I will wish I had invested in hard
copies!
While
I love having the electronic version of the magazine on my Nook, I really enjoy
flipping pages in magazines while my husband watches TV. Mostly habit.
I
don't have a preferred method for reading books electronically vs print -- I
chose electronically because it's easy to carry my Kindle instead of a carrying
around a large book.
As
the eyes get worse, electronic media allows me to read more. I can adjust the
font and read quickly again. Most electronic magazines are difficult to read as
the zoom cannot be customized. I hope it gets improved.
I
love to read - it's good exercise for the brain, plus it relaxes me.
BOOKS!
Maybe if I owned an e-reader I'd use it. But I like physical books. Besides,
they look way better on my bookshelves that the electronic versions.
Besides
the ease of carrying around your reader, it is so much less expensive and you
don't have to deal with full bookcases.
If you've ever seen a
teenager's texting grammar (and some adults), I think we should just be
thankful that people are still reading at all!
Verbatim
(cont.)
Do
we really have to do everything in life electronically? Real books are precious
and you can always "access" them without battery power or hoping the
electronics work today.
Other
than professional journals, I read for relaxation. An electronic screen is not
relaxing.
This
girl is old school - I prefer to read in print.
I
tend to read more books electronically because the one's I want to read can be
purchased right away and I can start to read immediately rather than waiting
for the book to become available at the library.
#1
it is much enjoyable to hold the book/magazine in our hand. Holding an
electronic device just doesn't do it for me. Short subjects are OK to read
electronically but I just can't get into reading books that way. Turning a page
is so much better than swiping the screen. I can't put it into words but
holding a book is soooooo much better. #2 I look at a computer screen all day.
I don't want to read my books that way. Too much computer is not a good thing.
I
read every day. I bought a Kindle because I travel and that eliminated a
suitcase. Now I want all my favorites in the Kindle so that I have them no
matter where I am. Technology can be cool. 🙂
Since
I got my first Kindle (I'm on my second) I am almost always in the process of
reading a book. The backlight Kindle makes it easy to read in bed.
I
tried e-books for a while and thought I might make the switch...but I
discovered that actually holding a book and turning the pages is part of the
fun. I felt like I lost the history of a book when I read it on-screen.
Unmentioned
in your survey were audiobooks, which is how I do most of my reading nowadays.
Most
of my reading is done electronically, however I wouldn't say it's via a
magazine or book. My favorite part of the week: Sunday morning newspaper
(print) with a big cup of coffee.
I am an avid reader,
at least several chapters a day. I believe it keeps the mind sharp and I find
it very relaxing. I love historical novels, especially about Colonial America.
I'm a hoot at cocktail parties because I have all this useless information from
my reading that I can't help sharing. My husband and I just bought eReaders and
we love them! I have about 10 more hard cover books to finish up and then I'm a
100% convert to eBooks. They are easier to handle, great for travel, and we
seem to finish books faster in this format.
Verbatim
(cont.)
Some
older books aren't in electronic media yet so of course, I read those in print.
I am a member of paperbackswap.com; where I get most of my books, so of course
they are in print media. However, I am constantly purchasing books for my
Kindle as I hear about them. Technology is wonderful!
At
my age and Eyesight my Kindle has been a great blessing. However the Magazines
usually are not formatted well for the Kindle, so they are usually read from
paper.
This
survey does not include audiobooks, which is the reading format that I use the
most. I read / listen on the daily commute. Please don't tell me that listening
to a book is not reading because I will counter that listening to a book is how
many blind, low vision and auditory learners read and ingest information and
stories. I'm part of a growing trend of audiobook readers. According to a Wall
Street Journal article. "Audio books have ballooned into a $1.2 billion
industry, up from $480 million in retail sales in 1997. Unit sales of
downloaded audio books grew by nearly 30% in 2011 compared with 2010, according
to the Audio Publishers Association." (http://online.wsj.com/news/articles/SB10001424127887323854904578637850049098298#printMode)
There
are pros and cons to each medium. However, being in the boomer generation, old
habits die hard...a comfortable chair, a sunny window, a favorite beverage and
most importantly a well written, engaging paper (book, magazine or newspaper) -
is a welcome respite in a hurried world.
I
like the 'feel' of a book - just as I like the 'feel' of the Sunday newspaper.
What good is reading if you can't stroke the pages?
I
am fanatical about keeping my books in pristine condition. So when I travel, or
bring a book to read a lunch, it is usually electronically. However, at home I
read books in print and have an extensive library. How many books I read a
year, about 125 -150.
I
used to read a book a week when I was carpooling to work. My e-reader was
perfect for that, because it was lightweight, portable, and back lit. Since the
company no longer subsidizes the car pool, our pool has broken up, and sadly,
I'm down to one or two books a month.
So
far my preferred method of reading books is in print because I don't know any
better. I haven't tried it on my iPad yet. Maybe I'll find it more convenient
than print. However, I don't want to bring my iPad on vacation for fear of
losing it, so I will buy print books to bring on vacation. So I'm back to just
print!
I
read a lot but I don't purchase books. The only money that exchanges hands is
in the form of overdue library fees I invariably end up owing.
I
just really like the feel of paper and the heft of a book. I guess that shows
my age....
I read my daily
newspaper electronically; I receive the Sunday paper in print, but would gladly
skip that. I subscribe to several auto enthusiast magazines, which are
constantly hawking their online editions. So I have to pay extra above my
existing paid subscription to use a device I paid for to use internet access I
paid for so that they can cut printing and shipping costs? How is this a viable
business model? Especially when they are all-Apple and I don't happen to adhere
to that particular cult.
Verbatim
(cont.)
If
they invent an e-reader that can emit the smell of pages bound in leather, I'll
make the switch.
Received
a Kindle for Christmas. Books are cheaper electronically but I prefer to hold a
real book.
I
am one of those people who thought reading books electronically was horrible,
until I was given an iPad mini and can read books using the library system.
Still do like to curl up in a chair, by the fire, with an interesting book! As
for magazines - professional type I find easier to read electronically, social
type, I prefer in print.
I
tend not to buy books but rather to get them out of the library. Usually 4 a
week
I'm
an avid reader, depending on how busy my schedule it. I do not like reading
electronically because after spending a good portion of my workday staring at a
computer, that's the last thing I want to do during my time off. Besides, I
like the feel and smell of a book, especially old ones.
I
just read my first book electronically and I've started two more. I'm not sure
if I'll convert to being 100% electronic which is why I'm trying a couple more.
It
takes me months to get through 1 book due to the never ending list of
investmentpension401k reading.
I
like the feel of a book and my hand and pleasure of turning pages.
I
read nearly constantly and still much prefer actual books.
love
print - tried electronic - find it less than desirable
As someone who
originally resisted an electronic reader, I must say that I love my Kindle! The
ability to carry all those books at once is incredible and I never have to
worry about what to do if I finish a book on an airplane - I just start another
one!
Verbatim
(cont.)
I
used to hardly ever read books but when I first got my e-reader for Christmas,
I read at least 20 book in a matter of weeks! LOVE IT.
I
love books in print but my Kindle is so much more convenient, weighs less, and
is easier on my arthritic thumbs.
I
started reading electronically when I fell and hurt my foot a few years ago. It
was easier to buy books online than to go to the store. I still read paper
books, but it is so easy to have my mini iPad in my purse. I sneak it out and
read a few pages while waiting in lines at stores and you never know when the
doctor's office is backed up and you can finish off the current book and start
on the next one. Last year my sister challenged me to read a book a week. I
read 115 books. 60 electronically and 55 on paper.
My
wife said it best; "Electronically, of course!" "My outfit cost
x-hundred, the purse another x-hundred and the briefcase x-hundred, not to
mention the shoes, glasses, etc for x-hundreds, too. I don't look like I read
trashy romance novels." Love her dearly but, honey I know better.
I
am an avid reader of mysteries and keep a spreadsheet to track my books. I read
almost 300 books last year and carry one with me wherever I go. While I love my
iPad for all it has to offer - games, email, apps - I still like holding books
in my hand when reading and haven't made the shift to electronic media yet. I dread
the day when I will be forced to do so, but until then, I happily borrow from
the local library and purchase hardcovers from Amazon.com.
I
use my library extensively and like to hold a hard copy book. Guess I am old
fashioned!
NOTE: Responses reflect the opinions of
individual readers and not necessarily the stance of Asset International or its
affiliates.