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Old 05-07-2018, 08:03 AM   #1
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Accounting for Dummies

Each year at this time Megacorp mails me the Annual Funding Notice for its pension plan. It's jolly reading, believe me.

Especially charming is the bit where it shows the Funding Target Attainment Percentage, which has been sinking for the past three years despite a torrid stock market. Of course, that may not be huge a surprise when you consider that the majority of the money is invested in debt instruments instead of in equities.

But with every edition, I get a bit irritated because the AFN includes some accounting-speak that ordinary mortals like me don't fully comprehend. Perhaps one of the actuaries on forum can explain exactly what "Funding Standard Carryover Balance" and "Prefunding Balance" mean. I've tried scanning the interwebs, but the explanations I find there are still couched in jargon.

Is there anybody here who can explain these terms in words that I can understand? Even better, can anybody explain the implications of these values being nonzero? (I suspect when they are nonzero, it's not very good, since their arithmetic effect is to reduce the Net Plan Assets.)

Thank you in advance,

M
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Old 05-07-2018, 08:22 AM   #2
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From my reading but I'm not an expert....

The prefunding balance is the cumulative contributions by the employer over the minimum required contributions.... so if the minimum required contributions for the year are $100 and the sponsor contribute $110, the prefunding balance increases by $10... and vice versa where the sponsor contribution is less than the minimum required contribution.

See https://institutional.vanguard.com/iam/pdf/DBIBF.pdf page 2

The funding standard carryover balance is the similar but relating to time periods prior to changes in pension funding laws.
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Old 05-07-2018, 08:33 AM   #3
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Originally Posted by Mdlerth View Post
Perhaps one of the actuaries on forum can explain exactly what "Funding Standard Carryover Balance" and "Prefunding Balance" mean.
Not an actuary, just soon-to-be pensioner with some crude understanding of the matter.

Funding Standard Carryover Balance = employer contributions made in prior year(s) above the minimum level required by law.
Generally, an employer might credit the excess money toward the minimum level of contributions required by law it must make in future years. Plans must subtract these credit balances from Total Plan Assets to properly calculate their Funding Target Attainment Percentage.

Prefunding Balance = no clue.
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Old 05-07-2018, 08:57 AM   #4
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I'm a property-casualty actuary so not much help, either. How do you feel about asking HR? Not that they'd have a ready answer but maybe they can track it down. Depends on the politics of your company, unfortunately. In some you don't want to ask difficult questions of HR.
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Old 05-07-2018, 10:05 AM   #5
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Originally Posted by pb4uski View Post
The prefunding balance is the cumulative contributions by the employer over the minimum required contributions.... so if the minimum required contributions for the year are $100 and the sponsor contribute $110, the prefunding balance increases by $10... and vice versa where the sponsor contribution is less than the minimum required contribution.
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Funding Standard Carryover Balance = employer contributions made in prior year(s) above the minimum level required by law.
Generally, an employer might credit the excess money toward the minimum level of contributions required by law it must make in future years. Plans must subtract these credit balances from Total Plan Assets to properly calculate their Funding Target Attainment Percentage.
Thank you for responding. I had read those same explanations, but I still struggle with what conclusion I should draw from them.

I know that "Total Plan Assets" are an actuarial calculation, not simply the sum of all the assets on valuation day. I couldn't tell you the complete list of data used in that calculation, but I speculate that it must include some estimate of future contributions by Megacorp.

Since the result of either of those balances being nonzero is to reduce the Net Plan Assets (and consequently the Funding Target Attainment Percentage), I'm not particularly reassured when they are big numbers i.e., billions. It sounds like they are a sort of get-out-of-jail-free card for the plan sponsor, permitting Megacorp to dodge some future contributions. Am I correct?
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Old 05-07-2018, 12:41 PM   #6
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It sounds like they are a sort of get-out-of-jail-free card for the plan sponsor, permitting Megacorp to dodge some future contributions. Am I correct?
Not quite.

If you took a look at the Form 5500 filed by your Megacorp, what you'd see in Schedule SB - Part I - as the Total Plan Assets number is indeed an actuarial value. Its market value is usually higher.

Under Funding Targets you would see 3 actuarial values - for beneficiaries already receiving payments, for terminated vested participants, and for active participants. The sum of these 3 gives you the Total Funding Target (the same is listed as Plan Liabilities in the notice you received).

The Part II of the same form displays what you are actually after. I am pasting an excerpt here from an example for your perusal.

This site:
https://www.irs.gov/retirement-plans/form-5500-corner
has the instructions for filling out Form 5500, and I believe if you review them, you will get your questions answerred.
If not, you could always chase down your plan administrator and ask, as this person definitely has fiduciary duties towards the plan participants.

Your particular Megacorp's Forms 5500 are available here:
https://www.efast.dol.gov/portal/app...execution=e1s1
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Old 05-07-2018, 12:51 PM   #7
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You may find this link helpful http://www.retire.prudential.com/med...an_funding.pdf
A prefunding balance is when an employer paid in more than the minimum required contribution in a previous year. Under certain circumstances, it can be used to offset current contributions.
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Old 05-07-2018, 02:16 PM   #8
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Seems to me that what I care about is: (a) the pension's future liabilities, and (b) the total assets available to meet those liabilities. I understand there are tons of actuarial assumptions and so on. But why would total assets be *reduced* because some prior year contribution was greater than required? That makes no sense to me. Can someone explain the reasoning or theory?
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Old 05-08-2018, 08:11 AM   #9
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Originally Posted by MichaelB View Post
You may find this link helpful http://www.retire.prudential.com/med...an_funding.pdf
A prefunding balance is when an employer paid in more than the minimum required contribution in a previous year. Under certain circumstances, it can be used to offset current contributions.
Despite what one might think a prefunding balance is a negative not a positve. The first and most important item is the actuarial level of funding and the interest rates assumed by the plan and then determining if what the plan is using is likely to occur.

From there the prefunding balance is a get out of jail free card for a corporation when they get into cash troubles, they can use already deposited funds to not fund into the future NO MATTER WHAT THE ACTUARIAL PERCENTAGE actually is. So in such a case the actuarial balance in a short time can plummet if a corp uses funds in the pension plan to count as funding in a falling market for a year or two. It also allows corporations to improve cash flow on the financials when they decide cash flow needs window dressing.
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Old 05-11-2018, 09:03 PM   #10
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Despite what one might think a prefunding balance is a negative not a positve. The first and most important item is the actuarial level of funding and the interest rates assumed by the plan and then determining if what the plan is using is likely to occur.

From there the prefunding balance is a get out of jail free card for a corporation when they get into cash troubles, they can use already deposited funds to not fund into the future NO MATTER WHAT THE ACTUARIAL PERCENTAGE actually is. So in such a case the actuarial balance in a short time can plummet if a corp uses funds in the pension plan to count as funding in a falling market for a year or two. It also allows corporations to improve cash flow on the financials when they decide cash flow needs window dressing.
Thanks. But I still don't get why prefunding is a negative. I get that it buys the corp some cashflow reporting flexibility going forward. But why is that bad from the perspective of a pensioner? Is that not a separate issue from whether the pension's underlying economic integrity is better or worse? My Mega says their funding % is well over 100%, but then it drops to 86% when they reduce total assets for prefunding. I'm sitting here wondering, "Which is it??" Why do the rules require that they completely disregard a huge pile of assets in the pension trust?
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Old 05-11-2018, 09:13 PM   #11
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Thanks. But I still don't get why prefunding is a negative. I get that it buys the corp some cashflow reporting flexibility going forward. But why is that bad from the perspective of a pensioner? Is that not a separate issue from whether the pension's underlying economic integrity is better or worse? My Mega says their funding % is well over 100%, but then it drops to 86% when they reduce total assets for prefunding. I'm sitting here wondering, "Which is it??" Why do the rules require that they completely disregard a huge pile of assets in the pension trust?
Just going on a wild guess here... but I bet that they can use that prefunding to offset future required contributions.... so if mega gets in trouble they are not going to put any money into the system and the ratio would drop to that 86% eventually....

As I said, just a guess...
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Old 05-11-2018, 11:39 PM   #12
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+1 the prefunding is like that plan owing the sponsor... except that the sponsor can't get the money refunded but only as a credit towards future contributions if certain conditions are met.
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Old 05-12-2018, 03:48 AM   #13
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Good discussion folks -- I will have to bookmark this thread.

The Department of Labor provides a Model Annual Funding Notice at this link

If your company is using some other way to communicate this information to you, then you may final the model notice useful.

If you want to do a deep-dive into this (ie legal and regulatory requirements) beyond what your employer discloses, this may also be useful.

The Single-Employer Plan Model Notice is located about 4/5 of the way down in Appendix A.

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