Administration March 5, 2012

State Pensions See Bump in Funded Status

March 5, 2012 (PLANSPONSOR.com) - Wilshire’s 2012 Report on Funding of State Retirement Systems shows an increase in the funded status of plans.  

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Wilshire Consulting estimates, of the 126 state retirement systems included in the study, the ratio of pension assets-to-liabilities, or funding ratio, for the plans was 77% in 2011, up from an estimated 69% in 2010. Wilshire states this improvement in funding ratio was fueled by strong global stock market performance in the 12 months ending June 30, 2011. Growth in fund assets managed to outpace growth in plan liabilities over fiscal 2011.

Other findings from the study include:

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•  For the 102 state retirement systems that reported actuarial data for 2011, pension assets and liabilities were $2,002.6 billion and $2,693.9 billion, respectively. The funding ratio for these 102 state pension plans was 74% in 2011, up from 66% for the same plans in 2010.

•  For the 102 state retirement systems that reported actuarial data for 2011, pension assets grew by 16.4%, or $282.8 billion, from $1,719.8 billion in 2010 to $2002.6 billion in 2011, while liabilities grew 3.3%, or $84.9 billion, from $2,609.0 billion in 2010 to $2,693.9 billion in 2011. The increase in asset values offset the continued steady growth in liabilities for the 102 state pension plans and led to a drop in the aggregate shortfall, as the -$889.2 billion shortfall in 2010 narrowed to a -$691.3 billion shortfall in 2011.

•  For the 126 state retirement systems that reported actuarial data for 2010, pension assets and liabilities in that year were $2216.9 billion and $3,225.2 billion, respectively. The funding ratio for these 126 state pension plans was 69% in 2010.

•  Of the 102 state retirement systems that reported actuarial data for 2011, 90% have market value of assets less than pension liabilities, or are underfunded. The average underfunded plan has a ratio of assets-to-liabilities equal to 71%.

•  Of the 126 state retirement systems that reported actuarial data for 2010, 98% were underfunded. The average underfunded plan has a ratio of assets-to-liabilities equal to 67%.

•  State pension portfolios have, on average, a 65.6% allocation to equities—including real estate and private equity—and a 34.4% allocation to fixed income. The 65.6% equity allocation is higher than the 63.6% equity allocation in 2001 and largely reflects a rotation out of U.S. public equities and into non-U.S. equities, real estate and private equity.

•  Asset allocation varies by retirement system. Thirteen of 126 retirement systems have allocations to equity that equal or exceed 75%, and 10 systems have an equity allocation below 50%. The 25th and 75th percentile range for equity allocation is 60.2% to 73.0%.

Wilshire forecasts a long-term median plan return equal to 6.4% per annum, which is 1.6 percentage points below the median actuarial interest rate assumption of 8.0%. Wilshire’s assumptions range over a conservative 10+-year time horizon, while pension plan interest rate assumptions typically project over 20 to 30 years.

Compliance March 5, 2012

IRS Addresses Agreements to Rehire Retirees

March 5, 2012 (PLANSPONSOR.com) - The Internal Revenue Service (IRS)  issued a private letter ruling concluding that defined benefit (DB) plan participants who stop working for their employer with the explicit expectation of being rehired a short time later have not legitimately retired.
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As such, these participants would not be eligible for early retirement benefits, and the practice would put the DB plan at risk of disqualification, Towers Watson reports in its Insider newsletter.  

To retain employees eligible for early retirement subsidies — particularly those with specialized skills or knowledge — plan sponsors often look to phased retirement options, Towers Watson explained. One such option has been allowing participants to retire and begin receiving their benefits with the understanding that they will be rehired a short time later.   

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The IRS’ private letter ruling should serve as a warning against this practice. Specifically, the ruling suggests that simply requiring the “retired” employee to wait for some period, such as 30 days, before restarting employment may not meet the requirements, at least not where there is a pre-termination re-employment understanding between the employer and the plan participant. The ruling also suggests that the IRS will not consider a change in status — such as from employee to independent contractor — to constitute termination from employment.  

Towers Watson notes, while private letter rulings are directed to a specific taxpayer and do not constitute legal precedent, they often reflect the broader thinking of the IRS on an issue. Although formal guidance might not specifically prohibit the practice the multiemployer plan was proposing, plan sponsors interested in such arrangements should seek guidance from their legal counsel before proceeding.

According to Towers Watson, the ruling was requested for a multiemployer pension plan in "critical" funded status that was proposing to eliminate all subsidized early retirement benefits under its rehabilitation plan. The plan administrator was concerned that, after becoming aware of the upcoming change, eligible participants would retire early and possibly en masse to avoid losing the subsidies.  

To avert that outcome, the sponsor wanted to give these employees up to 60 days before the change took effect to elect to retire — thereby locking in the value of the early retirement subsidy — and then return to work. While returning to work would suspend the early benefit payments, the so-called early retirees would be entitled to the subsidized benefits upon their later “real” retirement. Under the proposal, employees would have been permitted to “retire” on one day and return to work within a week, sometimes the very next day. The plan sought a ruling from the IRS before going ahead with its proposal.  

While the IRS ruled against the idea, the ruling notes that employees might qualify for subsidized early retirement benefits at age 62 under IRS rules for in-service distributions, if the plan so provides. Under IRS regulations, pensions may pay out benefits only after retirement (or after the employee reaches normal retirement age or age 62), and working fewer hours does not constitute retirement.

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