Pension Protection Act of 2006 (PPA) Overview: Sweeping Changes for Defined Benefit Pension Plans Presented by David S. Boomershine, Senior Actuary Boomershine.

Pension Protection Act of 2006(PPA)

Overview:Sweeping Changes for

Defined Benefit Pension Plans

Presented byDavid S. Boomershine, Senior ActuaryBoomershine Consulting Group, LLC

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Agenda

• Pension Protection Act

- Funding Rules

- Other

• Financial Accounting Standards 158

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PPA Funding Rules

• Funding Target Achievement Percentage (FTAP)

• Asset Valuation

• Revised Interest Rate Basis

• Mortality Tables

• Minimum Contributions

• Credit Balance options

• Maximum Deductible Contributions

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PPA Funding Rules

Funding Target Achievement Percentage (FTAP)• Funding Target: 100% of Present Value of Accrued Benefits

• Transition: 92%/2008 94%/2009 96%/2010 100%/2011

- If no Deficit Reduction Contribution in 2007

• Use revised required assumption basis

Asset ValuationOptions allowed:

• Fair Market Value (FMV)

• Smoothed investment returns – over 24 months

- Smoothed value must be between 90% - 110% of FMV

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PPA Funding Rules

Revised Interest Rate Basis• Yield curve: 3 segments

• 3 segments: 5 years / 15 years / 20+ years

• Based on 24-month average of quality corporate bonds

• Alternative: full yield curve

• Transition: 2008 – 2010

Mortality Tables• 2007: Based on RP 2000 table – projected

• 2008: Prescribed by Secretary of the Treasury

- Actual plan-specific experience (if large plan)

- Also use projected trends

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Minimum Required Contributions• Adjusted Assets – reduced by Credit Balance

• Minimum Required Contribution (MRC):

Target Normal Cost+

Shortfall Amortization Charge

• Shortfall Amortization Charge- Shortfall: 100% of Funding Target* - Adjusted Asset Value (i.e.

Unfunded Actuarial Liability)- Amortize over 7 year period

*Note: Transition targets• MRC may be reduced by Credit Balance, if FTAP > 80%• “At Risk” Plans – FTAP < 80% (transition rules apply): Accelerated

funding requirements

PPA Funding Rules

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PPA Funding Rules

Credit Balances (CB)• 2 Types:

- Carryover Balance (COB) – old

- Prefunding Balance (PFB) – new

• 3 Primary Approaches:

- Maintain CB, keep future funding flexibility

- Use CB, towards Minimum Required Contributions

- “Burn” CB, to increase Funded Ratio

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PPA Funding Rules

Maximum Deductible Contributions• For 2008:

Funding Target (FT) - Assets+

Normal Cost+

Cushion = 50% of FT, plus “allowance”

• Concern: Overfunded Plans?

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Other PPA Issues

• Benefit Limitations

• Benefit Distributions

• PBGC Premiums

• Disclosure Requirements

• Hybrid Plans

• Phased Retirement

• Combination DB/K Plans

• Governmental DB Plans

• Multi Employer DB Plans

• Non-qualified Deferred Compensation Plans

• Overfunded Plans/Section 420 Transfers

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Other PPA Issues

Benefit Limitations• Funded less than 80%

- No benefit increases- Partial restriction on lump sums

• Funded less than 60%- Frozen benefit accruals- No lump sums- No shutdown benefits

• Credit Balances must be “burned” to avoid lump sum restrictions - ?

• No Credit Balance offset required for these determinations - ?

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Other PPA Issues

Benefit DistributionsFor Lump Sums:

• For 2008: Revised interest rate basis: 3 segments

• Phased in 20%/year – by 2012

• Mortality table

• Minimum lump sums

Also, must offer 75% Qualified Optional Survivor Annuity

PBGC Premiums• For 2007: Exemption for Variable Rate Premium due to meeting

Full Funding Limitation has been eliminated

• Variable Rate Premium applies if less than 100% funded

• Interest rate revised

• Use Market Value of Assets

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Other PPA Issues

Disclosure Requirements• Pension Benefit Statements – Options:

- At least once every 3 years: due 2009 plan year- Annual notice that statements are available upon request – due 2007

• 2008 Funding Notice: Replaces Summary Annual Report- Target Attainment Percentage (Funded Status)- Assets- Liabilities- Participant counts- Plan’s funding policy- Asset Allocation- Amendments and material events- Due 120 days after end of Plan Year

• PBGC Filing required if under 80% funded – with Participant Notice

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Hybrid Plans (Cash Balance)• “New Age” Discrimination Testing

• Comparison based on:

- Annuity

- Account Balance

- % of pay

• Some past hybrid design issues resolved prospectively (Whipsaw)

• Interest credit – not greater than market rate of return

• Vesting: 3 years of service

• More viable plan design option now?

Other PPA Issues

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Other PPA Issues

• Phased Retirement

- In-service distributions allowed at age 62

• DB/K Plans: In 2010

- Single Plan may provide for DB and 401(k) benefits – if under 501 participants

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Additional Note:Financial Accounting Standards No. 158

• FASB 2-phase project: revamp standards

• FAS 158 – Phase 1:

- Asset/liability on financial balance sheet now based on Projected Benefit Obligation (PBO) vs. Accumulated Benefit Obligation (ABO)

• Impact: dramatically increases liabilities on balance sheets

• No impact on annual Net Expense

• Generally effective for fiscal years ending after 12/15/2006

• Measurement Date must now be last day of fiscal year – effective 12/15/2008

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?Questions?