The Internal Revenue Service is working on additional private letter rulings that cover lump-sum offers to retirees who are receiving pension benefits, a practitioner said during a webinar on such plan de-risking methods.
“We've heard the department is working on other rulings, but they haven't been made public yet,” said Robert Newman, a partner in Covington & Burling LLP's employee benefits and executive compensation practice group in Washington.
Newman spoke during an April 24 webinar, De-risking: Tradeoff Between Reduction in Volatility and Retirement Security, sponsored by the American Bar Association Joint Committee on Employee Benefits, in which he said the anticipated guidance may resemble past letter rulings as companies assess plans to manage and eliminate liabilities in defined benefit plans.
More plan sponsors are going through de-risking as regulations change, the workforce ages and life expectancy increases, said James Gannon, director of asset allocation and risk management for Russell Investments. Plans are growing, he said, and there is more concern as plan sponsors grapple with funding obligations and corporate profit.
Analyzing Cash Flow
Gannon said some plan sponsors are analyzing how much of their cash flow would need to be dedicated to fully fund plans. Many are finding that they need to dedicate at least a year of profit to fully funding plans, and that is playing a role in determining a company's success, he said.
Risk-management investors are searching for methods to prevent funding gaps in the future, Gannon said, as plan managers lose their appetite for volatile market values that swell and rapidly decrease. Many take the route of de-risking, he said.
“Plans are freezing all the time,” Gannon said. He cited Pension Benefit Guaranty Corporation data that show that as of 2011, more than 40 percent of plans were either frozen or closed and that the percentage of plans with hard freezes—in which all benefit accruals are ceased—rose from 9.5 percent in 2003 to 31.9 percent in 2011.
“This seems to be a one-way direction,” he said, “but maybe not at the rate at this time.”
Companies seemingly have planned their de-risking efforts to benefit their bottom line, Gannon said. Many companies waited until 2012 to offer lump-sum payouts when legislative changes in the Pension Protection Act allowed plans to calculate the amount of the lump sums using corporate bond rates instead of Treasury bond rates, Gannon said. Some plan sponsors are currently waiting for anticipated changes to rules regarding mortality calculations to offer more lump-sum payouts, he said.
“There will be many more done in 2014 than were done in 2013,” he said.
Excerpted from a story that ran in Pension & Benefits Daily (4/24/2014).
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