The Markets August 1, 2012

Consider PBGC Premiums Before Reducing DB Contributions

Advisers must consider the most effective ways to help sponsors take action under legislation that reduces required funding for defined benefit (DB) plans but increases their insurance premiums.
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Many plan sponsors use a 24-month average of interest rates to determine the plan’s funding target and annual cost. The new law, Moving Ahead for Progress in the 21st Century Act (MAP-21) (see “Congress Passes Bill with Pension Funding Relief”), prevents the average from moving more than 10% away from a 25-year average of corporate bond rates for 2012. After 2012, the corridor widens 5% per year, eventually reaching 30% on either side of the long-term average in 2016 and later, according to Principal Financial Group.

Under the new law, the funded status of an average plan could improve by 10% or more in 2012, which would reduce the 2012 annual contribution cost. However, Mike Clark, consulting actuary at Principal, told PLANSPONSOR that this legislation will “significantly” increase Pension Benefit Guaranty Corp. (PBGC) premiums, so plan sponsors may want to continue keeping their plans well-funded by contributing more than the minimum required under the legislation (see “DB Sponsors Have Incentives to Keep Plans Well-Funded”).

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Plan advisers must understand how plan sponsors view this law, Clark said. Do they see it as a benefit, or as a detriment because it leads to higher long-term PBGC premiums? Plan sponsors and advisers should discuss what option would lead to more savings.

Clark explained that plan sponsors must take both components of the PBGC premiums into account before taking action:

1.       Flat-dollar premium: In 2012, single-employer defined benefit plans pay flat-rate premiums of $35 per participant with future premiums indexed for inflation. Under the new law, these premiums will increase to $49 per participant in 2014 with indexing thereafter, Clark explained.

2.       Variable-rate premium: Under the law, the PBGC variable-rate premium that is assessed on each $1,000 of unfunded vested benefits will more than double by 2015. The more unfunded liability a plan has, the more will need to be paid to the PBGC to fill the deficit resulting from plans defaulting in the past.

The increase in flat-rate premium could increase the incentive for a plan to cash out terminated participants, and the increase in variable-rate premiums could increase the incentive for a plan to avoid unfunded vested benefits, according to a bulletin from Sibson Consulting. But if plan sponsors reduce the number of participants in the plan, it will not necessarily just save the $49 rate per participant, Clark said. “The variable-rate premium needs to be considered, as well,” he added.

The law will prompt many plan sponsors to consider settling obligations to get participants out of a plan, but they must realize that settling these obligations can change the funding position of the plan, Clark said.

Data & Research August 1, 2012

Advisers Fail to Discuss Health Care With Women

Women’s need to address their health care risks and costs presents an opportunity for advisers, since few advisers address these critical questions, Nationwide Financial said.
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While 65% of women have discussed their retirement with a financial adviser, of those who have, only 10% of women compared to 25% of men have discussed how much money they will need to cover health care costs apart from Medicare, according to a survey Harris Interactive conducted on behalf of Nationwide among 1,250 Americans with at least $250,000 in household assets.

Among the  women who have discussed health care with their adviser, the feedback is overwhelmingly positive, with 77% saying their adviser was either helpful or very helpful on this issue. By comparison, only 63% of men described their adviser as helpful or very helpful on health care. When discussing the role that Medicare will play in their retirement, the figures were even higher, with 83% of women describing their adviser as helpful or very helpful on this point, compared with 52% of men.

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Fifty-six percent of women said it is very or extremely important to educate themselves on Medicare when planning for retirement, and 43% said they planned to discuss the topic with their adviser.

“The good news is women want to have these discussions, and financial advisers can play a major role in helping women plan for and live in retirement by discussing the role Medicare will play in their retirement and helping them estimate health care costs in retirement,” said John Carter, president of sales and distribution for Nationwide Financial.

The problems at the heart of women’s greater health care burden, when compared to men, is the fact that women work an average of 12 years less and live five years longer than men, Nationwide said.

The survey found women close to retirement estimated they will need $4,624 each year to cover premiums, co-payments and deductibles, a full 21% less than the $5,882 that men said they would need.

“However, both are way off,” Nationwide said, citing Fidelity Consulting Services’s 2012 study that showed a 65-year-old couple retiring today would need $240,000 to cover medical expenses, not including long-termcare . (See “Health Care Costs Could Consume Retiree’s Income,” PLANADVISER 5/9/12.)

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