The Markets April 23, 2013

Corporate DB Plans Show $29B Increase

In March 2013, the nation's largest corporate defined benefit pension plans showed a $29 billion increase in funded status.
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This is based on a $14 billion decrease in the pension benefit obligation (PBO) and a $15 billion increase in assets, according to the most recent Pension Funding Index (PFI) produced by Milliman, Inc. The March improvement of $29 billion results in a cumulative improvement of $106 billion in the first quarter of 2013. The latest PFI reflects data from the annual update of the Milliman 100 companies’ 2012 financial figures included in “Milliman’s 2013 Pension Funding Study,” which was released in March.

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“We’ve followed a record deficit at the end of 2012 with a record first quarter to open 2013,” said John Ehrhardt, co-author of the study. “The funded ratio has gone from 77% at the end of last year to just under 83% at the end of the first quarter, which is about as strong of a rally as we could hope for in this persistent low-interest-rate environment.”

In March, the discount rate used to calculate pension liabilities increased from 4.16% to 4.22%, decreasing the PBO from $1.665 trillion to $1.651 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.351 trillion to $1.366 trillion.

Looking forward, if these 100 pension plans were to achieve their expected 7.5% median asset return and if the current discount rate of 4.22% were to be maintained throughout 2013 and 2014, their pension funded ratio would improve from 82.7% to 86.1% by the end of 2013 and to 91.3% by the end of 2014.

The complete study can be found here.

 

Compliance April 23, 2013

IRS Gives Amendment Relief to Certain ESOPs

The Internal Revenue Service (IRS) is granting relief for employee stock ownership plans (ESOPs) that have to make amendments to satisfy diversification requirements.
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Notice 2013-17 provides relief from the anti-cutback requirements of § 411(d)(6) of the Internal Revenue Code for plan amendments that eliminate a distribution option described in § 401(a)(28)(B)(ii)(I) from an ESOP that becomes subject to the diversification requirements of § 401(a)(35), which apply to certain defined contribution plans that hold (or are treated as holding) publicly traded employer securities.  

The notice addresses circumstances in which an ESOP that satisfied the diversification requirements of § 401(a)(28)(B)(i), by allowing distribution of a portion of a participant’s account, has become subject to the diversification requirements of § 401(a)(35). As a result of becoming subject to § 401(a)(35)(E), § 401(a)(28)(B) no longer applies and such an ESOP is no longer able to make distributions that (in the absence of the applicability of § 401(a)(28)(B)(i)) would be impermissible under other rules restricting the distribution of plan benefits before termination of employment or the occurrence of certain other events. Thus, under current rules for such plans, some in-service distribution options used to satisfy the diversification requirements under § 401(a)(28)(B) are no longer permissible.   

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The relief provided by the notice allows amendment of the ESOP to eliminate all in-service distribution options previously used to satisfy the diversification requirements of § 401(a)(28)(B)(i).   

The IRS explained that in general, under § 401(a)(28)(B)(i), an ESOP must provide certain participants the opportunity to elect to direct the plan as to the investment of at least 25% of the participant’s account. The ESOP is allowed to satisfy the diversification requirements by, among other means, distributing the portion of a participant’s account that is covered by the election within 90 days after the period during which the election may be made. However, Section 401(a)(35), which was added by Section 901(a)(1) of the Pension Protection Act of 2006 (PPA), requires an applicable defined contribution plan within the meaning of § 401(a)(35)(E) to meet certain diversification requirements with respect to investments in employer securities, and the diversification requirements cannot be satisfied by distributing a portion of the participant’s account.  

Notice 2013-17 is here.

 

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