Compliance December 29, 2016

IRS Proposes New Mortality Tables for DB Plans

These proposals would also update the requirements a plan sponsor must meet to obtain IRS approval to use mortality tables specific to the plan for minimum funding purposes, instead of the generally applicable mortality tables.
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The Internal Revenue Service (IRS) has revealed proposed regulations regarding mortality tables to be used by most defined benefit (DB) pension plans. These tables gage the probability of survival year-by-year for an individual based on age, gender, and other factors. This data along with actuarial assumptions is used to calculate the present value of a stream of expected future benefit payments, for purposes of determining the minimum funding requirements for a plan. These mortality tables also can be used to determine the minimum required amount of a lump-sum distribution from such a plan.

“The proposed regulations would update the mortality tables used to determine minimum required contributions for single-employer plans and current liability for multiemployer plans effective for plan years beginning in 2018,” explains Scott A. Hittner, FSA, partner and chief actuary at October Three. “The base mortality table would be updated from the RP-2000 table to the RP-2014 table.  Projected mortality improvements would be based on the MP-2016 scale, updated from Scale AA.” 

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The IRS also unveiled proposed regulations to update the requirements that a plan sponsor must meet in order to obtain IRS approval to use mortality tables specific to the plan for minimum funding purposes, instead of the generally applicable mortality tables.

“As under current rules, plans would be allowed to use either a generational table or separate static annuitant and nonannuitant tables, and small plans (those covering no more than 500 participants) would be permitted to use a combined annuitant/nonannuitant static table,” says Hittner.

He explains that the methodology used to develop static tables would be tweaked to vary the projection by age and gender. For purposes of updating mortality improvement rates after 2018, the IRS and Treasury expect to consider the anticipated annual updates from the SOA’s Retirement Plans Experience Committee (RPEC).

“In accordance with the changes made by the Bipartisan Budget Act of 2015, the proposed regulations would make substantial changes to the rules on using substitute mortality tables for determining single-employer minimum funding requirements,” says Hittner. “The changes would generally simplify the construction of experience-based substitute mortality tables and allow smaller plans not having “fully credible” mortality data to use a weighted average of the standard mortality table and the experience-based substitute mortality table that would result if the plan had fully credible data.  Small plans not having at least 100 deaths for a gender (substitute mortality tables are by gender, and if one gender doesn’t have credible experience, the standard table is used for that gender) over a five-year period are not permitted to use a substitute mortality table. In order to use a substitute mortality table, a sponsor would need IRS’ approval.”

Hittner adds, “The updated standard mortality tables may increase liabilities approximately 5%. However, the impact will vary from plan to plan and might be highest for retiree-heavy plans. Note that there should be no significant impact on cash balance plans.”

A document outlining these proposals can be found here.

Compliance December 29, 2016

DOL Offers New Guidance on Proxy Voting by Benefits Plans

The DOL says existing guidance to plan fiduciaries has been out of step with domestic and international trends in investment management, and has potential to dissuade fiduciaries from exercising shareholder rights, including the voting of proxies.
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The Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) has updated guidance for plan fiduciaries in regards to proxy voting by employee benefits plans. The DOL released Interpretive Bulletin 2016-01. This withdraws IB 2008-2 and reinstates earlier guidance related to such proxy voting. It also comes with specific updates aimed at clarifying what the law requires of plan fiduciaries.

Employee benefits plans often have large shares in publicly held companies. Therefore, the agency has long held that it is important for plan administrators to know what their responsibilities are when they vote proxies on those shares or exercise other shareholder rights. The DOL argues that existing guidance to plan fiduciaries has been out of step with domestic and international trends in investment management and has the potential to dissuade fiduciaries from exercising shareholder rights, including the voting of proxies, in areas that are increasingly being recognized as important to long-term shareholder value.

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“Plan fiduciaries can often enhance and protect the interest of plan participants and beneficiaries by responsibly exercising their rights as shareholders,” says Phyllis C. Borzi, assistant secretary of labor for Employee Benefits Security. “This guidance removes perceived impediments to the prudent management of plans’ rights as shareholders, and encourages fiduciaries to manage those rights in the best interest of plan participants and beneficiaries.”

The new bulletin reinstates earlier guidance, IB 94-2, with key updates aimed at better assisting plan fiduciaries in understanding and meeting their obligations under the Employee Retirement Income Security Act (ERISA) with respect to proxy voting and shareholder engagement. The agency was also concerned that, despite the recent guidance on economically targeted investment issues provided in IB 2015-1, statements in IB 2008-2 may cause confusion as to whether or how a plan fiduciary may consider environmental, social and governance (ESG) issues in connection with proxy voting or undertaking other shareholder engagement activities.

The interpretative bulletin will be published in an upcoming edition of the Federal Register and can also be viewed at https://www.dol.gov/sites/default/files/ebsa/2016-31515.pdf.

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