PBGC Announces Maximum Benefit Coverage for 2016

The PBGC has just announced the maximum benefit coverage for both a single-employer plan and a multi-employer plan. The difference in coverage among the two plan types is huge!  Here is the PBGC’s release:

PBGC Maximum Insurance Benefit Level for 2016

October 28, 2015

WASHINGTON – The Pension Benefit Guaranty Corporation announced today that the annual maximum guaranteed benefit for a 65-year-old retiree in a single-employer plan remains at $60,136 for 2016. The guarantee for multiemployer plans also remains unchanged.

Single-Employer Plan Guarantee

The PBGC maximum guarantee for people covered by single-employer plans is linked to a cost-of-living adjustment, or COLA, in Social Security law. Next year, SSA’s cost-of-living-adjustment will be zero. Accordingly, the maximum guarantee for the agency’s single-employer program will not change from the current 2015 levels.

The single-employer guarantee formula provides lower amounts for people who begin getting benefits from PBGC before age 65, reflecting the fact that they will receive more monthly pension checks over their expected lifetime. Amounts are higher for benefits starting at ages above 65.

Also, benefits are reduced for retirees who select to have payments sent to a beneficiary following their death. A table showing the 2016 single-employer guarantee amounts payable at ages other than 65 is available on PBGC’s website. Because the age 65 amount isn’t changing, the 2016 table is identical to 2015.

In most cases, the single-employer guarantee is larger than the pension earned by people in such plans. According to a 2006 study, almost 85 percent of retirees receiving PBGC benefits at that time received the full amount of their earned benefit. (For more information see the entry “Making Sense of the Maximum Insurance Benefit” in PBGC blog, Retirement Matters.)

The published maximum insurance benefit represents the cap on what PBGC guarantees, not on what PBGC pays. In some cases, PBGC pays benefits above the guaranteed amount. This depends on the retiree’s age and how much money was in the plan when it terminated.

For more information about how the single-employer guarantee works, see PBGC’s fact sheet Pension Guarantees.

Multiemployer Plan Guarantee Limit

The PBGC maximum guarantee for participants in multiemployer plans is also based on a formula prescribed by federal law. Unlike the single-employer formula, the multiemployer guarantee is not indexed (i.e., it remains the same from year to year) and does not vary based on the retiree’s age or payment form.

Instead, it varies based on the retiree’s length of service. In addition, the multiemployer guarantee structure has two tiers, providing 100 percent coverage up to a certain level, and 75 percent coverage above that level. For a retiree with 30 years of service, the current annual limit is 100 percent of the first $3,960 and 75 percent of the next $11,760 for a total guarantee of $12,870. This limit has been in place since 2001.

About PBGC

PBGC protects the pension benefits of more than 40 million of America’s workers and retirees in nearly 26,000 private-sector pension plans. The agency is directly responsible for paying the benefits of more than 1.5 million people in failed pension plans. PBGC receives no taxpayer dollars and never has. Its operations are financed by insurance premiums and with assets and recoveries from failed plans.

Bad Policy – AGAIN!

Further hikes in PBGC premiums will help pay for a federal budget bill agreed to by the White House and congressional leaders late Monday.

But, at what cost to our economy and employees?

According to P&I, the budget deal, which lays out a two-year budget and extends the federal debt limit until March 2017, raises per-person premiums paid to the Pension Benefit Guaranty Corp. from $64 in 2016 to $68 in 2017, $73 in 2018 and $78 in 2019. The 2015 rate is $57. Variable rate premiums would increase to $38 by 2019 from the current $24.

The proposal also calls for extending pension funding stabilization rules for two more years, until 2022, to allow sponsors to use higher interest rates when calculating contribution rates. Regrettably, this is nothing more than fuzzy math, and it continues to mask the true economics for DB plans.

“Once again the employer-sponsored system is being targeted for revenue,” said Annette Guarisco Fildes, president and CEO of the ERISA Industry Committee, who predicted that the premium hike will give defined benefit plan sponsors “more reasons to consider exit strategies.” We, at KCS, absolutely agree. DB plans need to be preserved. Punishing sponsors by raising PBGC premiums is not supportive.

“It’s an incredibly bad idea and it’s going to have, in the long run, devastating consequences for the (defined benefit) system,” said Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets, in an interview.

According to P&I, PBGC officials had not called for additional premium increases in the single-employer program on top of ones already scheduled. “PBGC’s finances for the single-employer program have been improving steadily over the past few years, and there is really no reason to increase single-employer premiums at this time,” said Michael Kreps, a principal with Groom Law Group.

We’ve witnessed a precipitous decline in the use of DB plans during the last 30+ years. The elimination of DB plans as THE primary retirement vehicle and the move toward DC offerings to fill that gap is creating an environment in which there will be grave social and economic consequences. Enough already! Wake up Washington before the slope gets too slippery.

Housing Rental Expense killing DC contributions?

Despite the fact that inflation, as measured by the CPI, seems to be contained, rental expense for housing has jumped significantly in the US during the last decade.  As a country we are moving away from being a home ownership society to one that rents housing, as home ownership is now at its lowest since 1967! Furthermore, the only reason the home ownership rate is as “high” as it is, is due to homeowners in the 65 and over age group. For everyone else, home ownership rates are now the lowest recorded.

Compounding this problem is the fact that US household incomes are 7.2% less than they were in 1999. The lower incomes are being crushed by rising housing costs, medical expenses / insurance and education. Is it no wonder that folks don’t have any additional resources to fund their DC plans? What percentage of the US population really has discretionary income at this time?

According to the “State of the Nation’s Housing” report released by the Center for Housing Studies at Harvard, which showed that while inflation among most products and services may indeed be roughly as the Fed and BLS represent it, when it comes to rent things have never been worse.

According to the report, 2013 marked another year with a record-high number of cost burdened households – those paying more than 30 percent of income for housing. In the United States, 20.7 million renter households (49.0 percent) were cost burdened in 2013.  Alarmingly, 11.2 million (25%) all renter households, had “severe cost burdens, paying more than half of income for housing.” The median US renter household earned $32,700 in 2013 and spent $900 per month on housing costs.

So, do you still believe that the failure to fund defined contribution plans is because we have a population hellbent on consumption? The demise of the DB plan means that a significant percentage of our population will never be able to make adequate contributions (if any) into their retirement plan. The social and economic consequences for our country will be grave.

KCS Second Quarter 2015 Update

We are pleased to share with you the KCS Second Quarter Update.  As we previously reported through this blog, 2015 has been a better year for pension funding than 2014 was despite the lower market returns, as interest rates have backed up creating a negative growth rate for plan liabilities.  We hope that you find our update insightful. Have a wonderful day.

Click to access KCS2Q15.pdf

NJ’s Pension Battle – We Are All Losers

Last week the state Supreme Court of NJ ruled that the Christie administration had the right to reduce / eliminate the annual required contribution (ARC) for the public pension system, based on a constitutionally established practice that the responsibility to allocate public funds is embedded in the budget process. What appears to be a victory for Christie and NJ tax payers couldn’t be further from the truth!

In a pattern that has been repeated for nearly 20 years, one NJ “leader” after another has failed to make the necessary payments to adequately fund public pensions. By not making the full contribution again this year, we are once again kicking the proverbial can down the road.

Remember folks, the benefit that has been promised to our public fund employees is a LIABILITY that must be met. Not funding that liability only makes it more challenging for the pension plan in the long-term, as the plan loses the benefit of compounding returns / interest on each contribution.  Just think about the economic impact of not funding the $3.1 billion in 2015, especially if the plan would have earned the state’s presumed return on assets over the next 10-20 years.  By deferring that payment, we create a pay as you go system that is much more costly for everyone.

Furthermore, NJ’s pension issue isn’t just a matter of not making the annual required contribution. Why on earth would NJ’s pension officers decide to invest heavily in hedge funds / alternatives at the bottom of the market in 2009?  This decision has increased management costs, while returns on the funds have substantially underperformed cheap equity beta. DB plans have a relative objective (liabilities) and not an absolute objective (ROA). Using absolute product in a relative return environment makes little sense.

Our elected officials are kidding themselves If they think that the pension liability is somehow going away.  By not appropriately funding the liability now, they are only making it more difficult for the state the future.  Think that pensions are taking a big slug of NJ’s budget now, just wait for another 15-20 years.

The latest Iteration of the “High School Dance”

It has been a very long time since I was in high school, and as a result, things may be different today.  But, what I remember about my high school days and the dances at Palisades Park, NJ, were that the boys stood on one side of the gym and the girls stood on the other.  Occasionally a couple of girls would dance, but there was little fraternizing among the boys and girls.

Well, I get the same sense about the management of DB pension plans today, as I did at those dances a very long time ago.  It seems to me that we have on one side of the “gym” assets and on the other side is liabilities, and never the twain shall meet.  As a result, DB plans haven’t found their rhythm and there is no dancing!

We get periodic updates from a number of industry sources highlighting how the funded status is improving or deteriorating.  But we don’t seem to get a lot of direction on how we should mitigate the volatility in the funding of these extremely important retirement vehicles.  I can say with certainty that it isn’t striving to achieve the ROA.  That’s been tried, and DB plans continue to see deterioration in their funded ratios.

For too long, the asset side of the pension equation has dominated everyone’s focus, and as a result, a plan’s specific liabilities are usually only discussed when the latest actuarial report is presented, which is on a one or two year cycle.  This isn’t nearly often enough. We suggest that the primary objective for the assets should be the plan’s liabilities, and that every performance review start off with this comparison.  However, in order to get an accurate accounting of the liabilities one needs a custom liability index (CLI).

In order to preserve DB plans we need assets and liabilities dancing as one. Without this, DB plans face a very uncertain future. Are you ready to bring both parties to the dance floor?

Let Kamp Consulting Solutions Be Your DB Plan Advocate

Since KCS’s founding in August 2011, we have worked tirelessly to preserve defined benefit plans as the retirement vehicle of choice for both employees and employers.  Now, more than ever, our effort is needed.  With each passing day, week, month and year, it is becoming increasingly obvious that defined contribution plans are nothing more than glorified savings accounts, at best!

The Federal Reserve’s Household survey, released earlier this week, highlights the challenges facing or employees in trying to save and manage their retirements, as a significant portion of our labor force have accumulated nothing for retirement.  As we’ve stated on numerous occasions, there will be profound social and economic consequences for the US if we can’t manage its workforce through a dignified retirement.

The US economy is still only muddling through 6+ years following the great financial crisis. Much of the “credit” for the muted recovery and lower demand for goods and services can be attributable to weak wage growth.  Importantly, the modest growth in wages doesn’t just impact demand today, but it makes saving for tomorrow that much more challenging.

We need to secure our employee’s retirements through a monthly annuity structure that is best achieved through a DB plan or DB-like structure, such as Double DB. Unfortunately, the elimination of DB plans has been on an accelerated path, and according to the DOL, there are fewer than 25,000 active DB plans today (down from roughly 150,000 in ’86). We’ve seen estimates that the median DC account balance is <$15,000.  An account balance of that size will hardly get one through a year, let alone a retirement.

Furthermore, we shouldn’t be vilifying those employees who are fortunate to be in DB plans, but we should explore opportunities to extend their reach for those that aren’t.  Despite the fact that there are many plans that appear to be dramatically (and maybe unsustainably) underfunded, there are new approaches to the management of DB plans that can be implemented, which will set a plan on a glide path to financial wellness.  We sincerely appreciate that funding volatility can create havoc for both corporate and public entities, but that funding volatility can be mitigated, too.

The last thing that we want to witness is the further erosion in the use of DB plans in favor of DC offerings.  No one is going to win if that occurs. The impact on the employee is obvious, but has corporate America truly assessed the impact from a failed retirement system on the ability of US citizens to remain active members of the economy? KCS has the tools to stabilize and improve the funded status of your DB plans to truly make them viable offerings for the long-term. Let us be your advocate, especially if there is an attempt to freeze or terminate your plan at this time.

Double DB® – Answers To Your Questions

Earlier this week we shared with you the virtues of Double DB® and encouraged you to reach out with any questions.  I am very pleased with the response that we’ve gotten.

As a reminder, a group of us have confronted two important pension issues: pension cost volatility and resultant perilous pension indebtedness due to prior underfunding (see Illinois, NJ, and a host of other plans).

We have developed an over-arching, patent pending answer to all of it – Double DB®, which;
(1) Provides pensions, not “employee accessible” cash.
(2) Is “percentage of payroll” financed.
(3) Easily “manages” debt from past underfunding.

Here are some of your questions.

Q: How do you manage debt from past underfunding of a traditional DB plan?

Have the plan actuary determine the percentage of payroll expected to finance the plan debt in 30 years based on the actuary’s estimate of the rate of growth in the underlying payroll and the estimate of the rate of growth of the debt. Plan to allocate this percentage of payroll to debt financing every year. If it turns out that more or less than 30 years is required, simply accept the longer or shorter term or adjust the allocated percentage of payroll along the way.

Q: How do you fund and manage Double DB®?

Have the actuary determine the percentage of payroll needed to finance future service benefits of the plan. Plan to pay this percentage of payroll in every future year. In the first year, plan to place one half into a trust fund identified as DB1 and the other half into a trust fund identified as DB2. In the second and each future year, place the then actuarial cost of half of the future service benefit cost into DB1 and the remainder into DB2. Accordingly, one half of the future costs of the plan will always be financed on an actuarially sound basis within DB1, while DB2 will have assets reflecting the extent that experience is more favorable or less favorable than expected at the outset.

Q: What benefit can the employee expect to receive?

In each year of retirement a pensioner will receive one half the scheduled plan benefit from DB1 and an experience modified variation of the scheduled plan benefit from DB2. If an entering plan participant would prefer to have a level benefit rather than the two-part benefit as described, he/she may elect an option to receive, say, 90% of DB1 benefits from DB2 and thereby receiving 95% of the benefit value to which he/she is entitled in retirement. Accordingly, the DB2 component of the plan will be provided a 10% “fee” for taking the risk of paying a larger benefit than the benefit to which the pensioner was entitled over the years of retirement. The 90% component can be more than 90% if the actuary for the plan is satisfied that a higher percentage is justified based on his/her appraisal of the risk.

We thank you for your continued interest.  Please don’t hesitate to bring additional questions to our attention.

Double DB® – The Answer to a DB Plan’s Funding Volatility and More

Level cost, as a percentage of payroll, is the preferred basis for financing any retirement plan obligation, which is why 401(k) type defined contribution systems have become the nation’s most prevalent retirement vehicle.

Aware of this development and concerned about pre-retirement spending of accumulating funds by participating employees (loans, premature withdrawals), a group of us have confronted the culprit issues: pension cost volatility and resultant perilous pension indebtedness due to prior underfunding (see Illinois, NJ, and a host of other plans).

We have developed an over-arching, patent pending answer to all of it – Double DB®, which;
(1) Provides pensions, not “employee accessible” cash.
(2) Is “percentage of payroll” financed.
(3) Easily “manages” debt from past underfunding.

While accomplishing the above tasks, Double DB also removes the individual from having to manage these retirement assets.

If you would like to have a conversation about how a conversion of a current defined benefit plan to a Double DB® plan might work, please ask and we can send illustrative language or provide contact with our attorney / actuary.

Finally, It may be of interest to note that Chief Counsel’s Office of IRS regards the Double DB® concept favorably.

KCS May 2015 Fireside Chat – Do You Know The Answer?

We are pleased to share with you the latest edition of the KCS Fireside Chat series.

Click to access KCSFCMay2015.pdf

This article is the 34th in our series.  In this piece we explore whether or not the US Federal Reserve is likely to raise interest rates in the near-term – the $64,000 question.

The uncertainty surrounding this action continues to challenge DB plan asset allocation decisions.  Level to falling US rates will continue to harm DB plan funded ratios.

We hope that you find our insights thought provoking.  Please don’t hesitate to reach out to us with any comments and / or questions, or if we can be of any assistance to you.