Compliance July 8, 2014

PBGC Puts Hold on Shutdown Enforcement

July 8, 2014 (PLANSPONSOR.com) – The Pension Benefit Guaranty Corporation announced a moratorium, until the end of 2014, on the enforcement of 4062(e) cases.
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Employee Retirement Income Security Act (ERISA) Section 4062(e) requires companies with pension plans to report to the PBGC when they stop operations at a facility and employees lose their jobs. In such a case, 4062(e) calls for the company to provide financial security to protect the plan. The PBGC typically requires companies to make additional contributions or provide a financial guarantee.

The agency said the moratorium will enable PBGC to ensure that its efforts target cases where pensions are genuinely at risk.

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In November 2012, the agency implemented a pilot program under which it generally took no action to enforce Section 4062(e) liability against creditworthy companies or small plans and targeted its 4062(e) enforcement efforts at companies where the risk remained substantial. However, industry groups expressed concern that the pilot program affected business transactions that weaker companies needed, to recover (see “Industry Groups Urge PBGC to Rethink Shutdown Enforcement”).

PBGC said it will use the moratorium to consider further targeting and to work with plan sponsors to minimize effects on necessary business activities.

“PBGC’s mission is to preserve pensions and jobs,” says PBGC Director Josh Gotbaum. “We have targeted our enforcement efforts to be mindful of both. This latest action will give PBGC time to be more thoughtful and more effective.”

During the moratorium, from this July 8 through December 31, the PBGC will cease enforcement efforts on open and new cases. Companies should continue to report new 4062(e) events, but PBGC will take no action on those events during the moratorium.

In a statement, the American Benefits Council said it has expressed serious concern that, for many years—even after the agency’s 2012 announcement—the PBGC has regularly used its power to require employers to substantially overfund plans or make other large financial commitments in situations outside the scope of Section 4062(e). “PBGC’s enforcement has disrupted normal business activities. That is not what Congress intended; so we commend PBGC for this helpful action today,” Council President James A. Klein said.

Kathryn Ricard, ERISA Industry Committee (ERIC) senior vice president for retirement policy, said, “In our previous comment letter, we urged the agency to proceed with a more rational approach—one that would balance the real risk to the PBGC against unnecessary and additional regulations to all companies regulated by the PBGC.  

“We look forward to working with the agency to create workable rules that enable the PBGC to protect itself against the cost of terminating underfunded plans without imposing unnecessary burdens on employers.”

Administration July 8, 2014

June Brings Rebound for Pension Index

July 8, 2014 (PLANSPONSOR.com) – The Towers Watson Pension Index shows a 1.2% increase in the funded status of defined benefit (DB) plans during June, resulting in an index score of 75.1 as of June 30.
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Strong equity returns and a slight increase in bond yields were factors in moving the index up in June, says Towers Watson. While the June increase reverses a three-month decline in funded status, the index remains down 4% for 2014.

With investment returns, the equity portfolio for the index’s hypothetical benchmark pension plan returned 2.4% in June and is up 6.5% for the year to date. Yield decreases thus far in 2014 have resulted in stronger fixed-income returns.

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For interest rates, long yields increased slightly in June, but remain down about 50 basis points for the year. The credit spread (also known as the incremental yield on long corporate versus long government bonds) remains in the typical range of 90 to 100 basis points.

The index’s hypothetical DB plan is invested in a 60% equity and 40% fixed-income portfolio. That portfolio recorded a 1.4% return for June. The index also tracks two alternative investment portfolios with different mixes of equity and fixed income. Monthly returns on the 20% and 60% fixed-income portfolios were 1.9% and 1%, respectively.

Towers Watson also tracks a second version of the 60% fixed-income portfolio of the hypothetical plan, which incorporates longer duration fixed-income investments. That portfolio returned 0.9% for the month. The decrease in long bond yields so far in 2014 has made this portfolio the year’s return leader, following a lagging performance in 2013, according to Towers Watson.

The index notes that pension liabilities, as defined for U.S. accounting purposes, are typically measured based on yields on high quality corporate bonds as of the measurement date. Towers Watson uses its RATE:Link methodology, which matches those corporate yields to projected cash flows. Using this methodology, the benchmark discount rate was determined to be 4.33%, which is up two basis points for the month.

Similar to bond prices, the index notes that values for pension obligations move in the opposite direction of interest rates. Towers Watson’s liability index, which is based on projected benefit obligations, increased 0.2% for June, and reflects the net effects of interest accumulation and the increase in the discount rate.

The Towers Watson Pension Index is designed to provide an indicator of capital market effects on DB plan financing. Individual plan results vary due to factors such as portfolio composition, investment management strategy, liability characteristics and contribution policy.

More details about the June index can be found here.

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