PensionFundingTargetsandStrategiesBrianDonohue,ChicagoConsultingActuariesJerryMingione,TowersPerrinMay12,2004HistoryofFundingRulesInthebeginningoftime(post-ERISA)………….actuarieshadconsiderablecontrolovertheassumptionsandmethodsusedfordeterminingfundingrequirements.Financialassumptionsweresettobereasonableonalong-termbasis.Actuarialmethodswereselected,essentiallyrightfromthetextbook,withconsiderablefreedom.Unfundedliabilitieswerefundedover10-30yearperiods,basedonlevelpayments.HistoryofFundingRulesThenthingschangedlegislatively……..In1987,OBRAinstitutedtheconceptofcurrentliability,inordertobringasolvency/terminationbasisperspectivetofundingrequirements(andtaxdeductionallowances).

Basically,planswererequiredtomaintainafundinglevelof90%ofcurrentliability.Iftheyfellbelowthislevel,theywouldberequiredtocontributeadditionalamountstorecovertheirfundedpositionover(essentially)3-5years.Currentliability-basedfundingrequirementsweremademorestringentin1994:maximumCLinterestratereducedfrom110%to105%updatedmortalitytableincreasedrequiredfunding%’sfordeficitreductioncontributions.HistoryofFundingRulesAndcapitalmarketchangesupsetthedynamics……..Initiallyinterestrateswerehighenoughthattheterminationbasiscalculationsdidnotoverridethelong-termfundingbasisthatplanshadtraditionallyusedforfunding.Theninterestratesdeclinedinthe90’s,asdidequitymarketsintheearlyyearsofthisdecade–creatingthedoomsdayscenarioforpensionplans.Actuary-setlongterm-basedfinancialassumptionsdidnotreactmuch.Thus,thedynamicsofpensionfundingrequirementschangeddramatically.Treasurycutbacktheissuanceof30-yearbondsin1998,andtheneliminatedthementirelyin2001.Yieldson30-yearT-bondsdeclinedandthecreditspreadwidened.Itbecameapparentthatalegislativeremedywasrequired.Temporaryreliefwasgrantedfor2002-2003byraisingtheinterestratecapto120%.CurrentSituationLet’scompareassumptionsinthelate1980’svs.today:*Potentiallyincreasestoabout6.4%withinterestraterelief.19882004averagecontributioninterestrate8.4%8.3%30-yearTreasuryyield9.0%5.1%maximumcurrentliabilityrate10.1%

5.5%*CurrentSituationHere’swhatthosechangesimplyintermsofvaluationresultsandcontributionrequirements:198820042004withoutreliefwithreliefvaluationinterestrate8.4%8.3%8.3%currentliabilityrate10.1%5.5%6.4%AALfundedratio84%83%83%CLfundedratio115%73%81%regularminimum$47.3$49.2$49.2addtl.fundingcharge0.075.634.7minimumwithDRC124.983.9CurrentSituationThetypicalpensionplantodayhasacurrentliabilityfundedstatusintherangeof80-90%.Many,ofcourse,arewellbelowthislevel.Contributionrequirementstendtospikedramaticallyasfundedlevelsfallbelow90%.However,contributionrequirementsinmostcaseslagemergingfinancialexperiencebyroughly2-3years,duetotheeffectsof:volatilityrelieffour-yearaveragingofinterestratesassetsmoothingallowablecontributiontimingdelays.CurrentSituationPlansponsorshavetypicallynotbeenproactiveinaddressingtheirdecliningfundedpositions–withafewnotableexceptions.Why?Theycountedonsmoothingtoavoidtheworsteffectsofthecapitalmarketsituation,andthatthecapitalmarketsituationwouldimproveovertime.Theycountedonlegislatedsolutionstomitigatecontributionrequirements.Theimplicationsintermsoffuturecontributionrequirementswerenotalwaysmadeclear.Thenumberofalternativefundingmeasuresmadeithardtomonitorresultsanddetermine/prioritizefundingtargets.LessonsLearnedPoorlyfundedplansentailanumberofadverseconsequences,inadditiontospikesinfuturecontributionrequirements:quarterlycontributionrequirementsPBGCvariablepremiumsparticipantnoticesreunderfundingPBGCunderfundingnoticeadditionalminimumliability/chargestoshareholderequity.LessonsLearnedRecentexperiencehasexposedaneedtobettermonitorCLfunding,andpotentiallyadjustfundingovertimesoastomaintainatargetfundinglevel:60%toavoidrestrictionsonbenefitimprovements80%/90%toavoidadditionalfundingcharge+participantnotice100%toavoidquarterlycontributions.110%toavoidlumpsumrestrictionstotop25.125%toallowsection420transferstofundretireemedicalbenefits(basedonOBRACL).LessonsLearnedOtherpossiblefundingtargets:FFLtoavoidvariablepremiumABOtoavoidadditionalbalancesheetliability.LessonsLearnedWhile2003resultswerestrong,theyweren’tapanacea.Plansponsorsstillhavetheafter-effectsofsmoothingmethodologiestodealwith.Mostplansnowrealizethataminimumfundingstrategyisnotoptimal.Thereisalsoconsiderablelegislativeuncertaintyremaining:short-terminterestrateandDRC-relatedrelieflong-termfundingreform.ProactiveStrategiesPushbackquarterlycontributionsrequiresminoraccelerationofcontributiontimingimprovesCLfunded%reducesPBGCpremiums.AvoidDRC90%/90%/80%/80%patternavoidslargeincreaseinfundingrequirements.AvoidPBGCvariablepremiumfundingtargetbasedonFFLvariablepremiums,unlikecontributions,areadead-weightlosstoemployers.ProactiveStrategies200420052006200720082009Currentliability$828$975$1,106$1,220$1,314$1,398Marketvalueofassets8498869029791,0261,075Funded%(w/accruedcontributions)104%91%85%82%80%85%PBGCpremiumsContributions

January150.00.00.08.69.911.9

April150.00.08.69.911.928.9

July150.00.08.69.911.928.9

September1522.36.5103.1

October150.00.08.69.911.928.9Totalcontribution22.36.563.244.352.5201.6Example1:MinimumFundingAggregatecontributions:$390.4AggregatePBGCpremiums:$10.9ProactiveStrategies200420052006200720082009Currentliability$828$975$1,106$1,220$1,314$1,398Marketvalueofassets8498869029731,0141,056Funded%(w/accruedcontributions)104%91%88%84%82%91%PBGCpremiumsContributions

January150.00.00.07.78.610.4

April150.00.046.015.918.7129.2

July150.00.08.49.511.528.3

September159.811.829.0

October150.00.00.00.00.00.0Totalcontribution22.36.563.042.850.5196.8Example2:PushbackquarterlycontributionsAggregatecontributions:$381.9AggregatePBGCpremiums:$6.5ProactiveStrategies200420052006200720082009Currentliability$828$975$1,106$1,220$1,314$1,398Marketvalueofassets8498869029731,0141,159Funded%(w/accruedcontributions)104%91%88%84%90%90%PBGCPremiumsContributions

January150.00.00.0

April150.00.046.015.918.70.0

July150.00.08.49.511.50.0

September159.8110.671.6

October150.00.00.00.00.00.0TotalContribution22.36.563.042.8149.471.6Example3:AvoidDRCAggregatecontributions:$355.6AggregatePBGCpremiums:$4.5ProactiveStrategies200420052006200720082009Currentliability$828$975$1,106$1,220$1,314$1,398Marketvalueofassets8499359489711,0291,158Funded%(w/accruedcontributions)109%96%88%85%90%90%PBGCPremiumsContributions

January150.00.00.07.80.00.0

April150.00.00.015.911.40.0

July150.00.06.19.611.50.0

September1569.20.08.724.5109.772.0

October150.00.00.00.00.00.0TotalContribution69.20.014.757.8132.772.0Example4:AvoidPBGCvariablepremiumAggregatecontributions:$346.4AggregatePBGCpremiums:$1.8ProactiveStrategiesConsultantsneedtoclarifypensionfundingdecisionsforclients.Theactuarialreporthasbecomeacompliancedocument,notaconsultingdocument.Theoldmodel(minimumandmaximum)hasbeenreplacedbyanewmodel(targetsandconsequences)forpensionfunding.Forecastsareessentialtoclientunderstandinganddecision-making.Ultimately,pensionfundingdecisionsshouldbelesscomplicatedthantheycurrentlyseemtoemployers.ProactiveStrategiesLong-termstrategicapproaches--determinethelong-termcostoftheplan(e.g.,level%ofpay)andfundthisamount,subjecttomin/maxconstraintspotentiallyreducesthevolatilityofannualcontributionrequirementsdramaticallydoesthisbyavoidingthe“feastorfamine””scenariosthatmostplansponsorshavebeenseeing.Areaofconcern:howdovariationsincontributionrequirementscorrelatetotheupsanddownsofthebusinesscycle?Ineconomictermsitisnotjusttheamountofrequiredcontributionsthatshouldbeofconcern,butthepotentialdisutilityofhavingtomakethosecontributionsatthewrongtime.ProactiveStrategies2003MinimumFundingTarget2004200520062007Contributions20032004200520062007Analysisshowsthattargetcontributionsinadvanceofrequirementsshouldreducethelevelandvariabilityoffuturecontributions.ProactiveStrategiesWhatdocompanies’actualfundingpolicieslooklike–totheextenttheyhavedevelopedone?90%ofsurveyedcompaniesreportedhavingsometypeoffundingpolicy,althoughtypicallytheseareunwritten/informal.Contributiontargetswithinthesepolicieswereasfollows34%expectedtopaytheminimumrequiredcontribution16%targetedtomaintaina90%fundedlevelforcurrentliability8%targetedtoavoidPBGCvariablepremiums6%setfundedleveltargetsbasedonPBO/ABOmeasures5%targetedtoavoidparticipantunderfundingnotices5%expectedtopaythemaximumdeductibleamount.Source:2002TowersPerrinsurvey;115responsesFundingReformIntermsofnear-termfundingrelief,Congressseemspreparedtograntthefollowing:Replacementof30-yearTreasurybondyieldwithacompositerateconsistingofhighqualitylongcorporatebondindicesaddsasmuchas1.0%tothe4-yearweightedaveragefor2004(note:thereissomeuncertaintyastohowTreasurywillimplementthenewrate).Otherlimitedreliefprovidedforairlines,steel,andmultiemployerplansponsors.Theseprovisionswillonlybeeffectivefortwoyears--throughYE2005.Thuscontinuingeffortstocraftmorepermanentfundingreformwillbenecessary--startingimmediately.FundingReformWhatmightpermanentreformlooklike?TheTreasurydepartmenthasmadeproposalsalongthefollowinglines:Solvencymeasureswouldreflectsnapshotvaluesofassetsandliabilities,includinginterestratesbasedonayieldcurve.Thechangeswouldmakepensionfundingmoreresponsivetocapitalmarketconditionsandthevaryingeffectsofplandemographics.Therewouldbeincreaseddisclosurerequirementswithrespecttoplanfundedstatus(basedonthesamesnapshot/solvencymeasure),andrestrictionsonbenefitsprovidedunderpoorlyfundedplans.TherehavealsobeenproposalstomodifythePBGCpremiumstructuretobemorereflectiveoftheplantermination-relatedrisksentailedbydifferentplansandinvestmentstrategies.ThereisnoescapingthatthePBGCneedsadditionalrevenueinordertomakeupitscurrentshortfall;howtogetitisthequestion.FundingReformIfcurrentliabilitymeasuresarerevisedtoreflectasnapshotofcurrentcapitalmarketconditions,therewillbeconsiderablenewvolatilityinCLbasisfundingmeasures,andthusincontributionrequirements.Allpartiesseemtoagreethatitisappropriatetomakeotherchangesinordertoaddressthatexpectedvolatility.Somepreliminaryproposalshavebeenfloated,including:limitingtheyear-to-yearincreaseincontributionrequirements(e.g.,2%ofcoveredpayroll)averagingtheCLfundingratiosoveraperiodofyearsreducingthe%ofunfundedamounts(lengtheningtheamortizationperiod)requiredtobecontributedeachyear.Noneseemstheperfectsolution--eachhaspracticalproblemsattached.Q&AQuestions?CheapShots?Comments?9、靜夜四無無鄰，荒居居舊業貧。。。12月-2212月-22Tuesday,December20,202210、雨雨中中黃黃葉葉樹樹，，燈燈下下白白頭頭人人。。。。16:51:0316:51:0316:5112/20/20224:51:03PM11、以以我我獨獨沈沈久久，，愧愧君君相相見見頻頻。。。。12月月-2216:51:0316:51Dec-2220-Dec-2212、故故人人江江海海別別，，幾幾度度隔隔山山川川。。。。16:51:0316:51:0316:51Tuesday,December20,202213、乍乍見見翻翻疑疑夢夢，，相相悲悲各各問問年年。。。。12月月-2212月月-2216:51:0316:51:03December20,202214、他鄉生白發發，舊國見青青山。。20十二月月20224:51:03下午16:51:0312月-2215、比不了得就就不比，得不不到的就不要要。。。十二月224:51下下午12月-2216:51December20,202216、行動出成果果，工作出財財富。。2022/12/2016:51:0316:51:0320December202217、做做前前，，能能夠夠環環視視四四周周；；做做時時，，你你只只能能或或者者最最好好沿沿著著以以腳腳為為起起點點的的射射線線向向前前。。。。4:51:03下下午午4:51下下午午16:51:0312月月-229、沒沒有有失失敗敗，，只只有有暫暫時時停停止止成成功功！！。。12月月-2212月月-22Tuesday,December20,202210、很很多多事事情情努努力力了了未未必必有有結結果果，，但但是是不不努努力力卻卻什什么么改改變變也也沒沒有有。。。。16:51:0316:51:0316:5112/20/20224:51:03PM11、成功就就是日復復一日那那一點點點小小努努力的積積累。。。12月-2216:51:0316:51Dec-2220-Dec-2212、世間成成事，不不求其絕絕對圓滿滿，留一一份不足足，可