SOCIETY OF ACTUARIES
ANAHEIM SPRING MEETING
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Multiemployer Plan Issues
James J. McKeogh,F.S.A.
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Two Broad Topics
Minimum Funding Issues
Walking the Tightrope
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Minimum Funding - Basic
Amortization Period – Some Differences
Actuarial Cost Methods – Generally the
Same
Asset Valuation Methods – Expanded
Corridor Permitted in Some Cases.
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Amortization Periods
Single Multi-
Employer Employer
Gains / Losses 5 years 15 years
Assumption Changes 10 years 30 years
Waived Deficiency 5 years 15 years
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Asset Valuation Corridor
Minimum – lesser of 80% of market value
and 85% average adjusted value
Maximum – greater of 120% market value
and 115% average adjusted value.
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Minimum Funding Standards –
Other Differences
Deficit Reduction Contribution – N/A
Shortfall Funding Method
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Variations in Practice –
Normal Cost
NC expressed as ¢ / hr or ¢ / $ contributed
Valuation determines “Unit” Normal Cost
Schedule B NC = Unit NC x # Units
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Variations in Practice –
Entry Age Normal
Develop NC as if current multiplier always
in effect
Back into AL from PVB and PVFNC
Useful when accrual rates for future
service only increased.
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Example
Benefit is $20/YOS 1999
AL PVFNC PVB
At $20 5,000 5,000 10,000
At $40 10,000 10,000 20,000
Actual (split) 6,000 10,000 16,000
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Special Funding Relief
Waiver of Funding Deficiencies
Extension of Amortization Period
(IRC§412(e))
Borrowing from following year
Pension Funding Equity Act of 2004
(H.R.3108)
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Random Observation #1
“The test of assumption setting is NOT
whether experience is matched, but
whether gains/losses are minimized.”
Avoid statements like “Number of deaths [or
retirements or withdrawals] matched
expected number and, therefore, my
assumptions are working.”
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Random Observation #2
“Sometimes Unit Credit is more
conservative than Entry Age Normal.”
Define “Conservative” not as producing the
highest AL but producing the greatest
charges to Funding Standard Account.
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Random Observation #3
“Entry Age Normal gets harder to explain the
better I understand it.”
Consider:
Future Service Increase also increases AL
Negative AL
Raising turnover assumption INCREASES AL
Drifting Entry Ages
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Random Observation #4
“Some situations just do not lend themselves
to any one cost method.”
Consider a stable population where benefits are
significantly lower for those hired after a certain
date.
Old group is aging and shrinking. New group is
aging and growing. Client wants contribution
rates such that both groups are self-supporting.
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Random Observation #5
“Many of us need to be hit on the head to really
appreciate risk.”
What would we have done differently back in 1999?
Strengthen non-economic assumptions?
Immunize Liabilities?
Buy Annuities?
Change to lower actuarial value of assets?
Make minimal increases to satisfy maximum deductible?
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Random Observation #6
“We need more and better asset valuation
methods that are acceptable to the IRS
(corollary: once you get to the corridor
limit, forget about it).”
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Random Observation #7
“There is really no point to maximum
deductible rules for multiemployer
plans.”
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Random Observation #8
“A decreasing credit balance can be a
natural development.”
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Example of Problem -
Assumptions
Investment Return Assumed : 7%
Actual Investment Return : 8%
No Other Gains / Losses
1990 Changes
Benefit Increase Equal to Overfunding
Normal Cost Increases
Future Actual Investment Return : 7%
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Credit Balance
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1976 1981 1986 1991 1996 2001 2005
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Walking the Tightrope
When Can a Plan “Afford” a benefit Increase?
Or, Alternatively,
How much do benefits need to be decreased?
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“Scheduled Cost” Approach
Scheduled Cost is set equal to NC plus
amortization of over “n” years of UAL [n
usually in the 10-20 year range].
If contribution is more, benefits can be
increased. If less, then no increase.
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Issues with Scheduled Cost
Ignores Funding Standard Account
Actuarial or Market Value of Assets?
Is amortization period fixed or decreasing
each year?
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Projected Valuation Approach
Deterministic or Stochastic
Model funding status, credit balance, other
variables
Can reflect employment and other trends
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Issues with Projected
Costly, complicated, confusing
Minimum funding tends to become target
(i.e., the maximum)
Trustees want to retain flexibility
Trend assumptions critical
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Other Developments
Co-Actuary Arrangements
Legal liability of actuaries. Is a failure to
effectively communicate malpractice?
Second opinion assignments
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