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Old 08-25-2015, 11:00 AM   #21
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Originally Posted by Big_Hitter View Post
such as?
8% rate of return was the biggie (and I am a pension supporter).

-gauss
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Old 08-25-2015, 11:09 AM   #22
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8% rate of return was the biggie (and I am a pension supporter).

-gauss
Such an assumption was not uncommon 15 years ago, but since PPA (effective 2008) for ERISA funding valuations, the plan sponsor has to use either 1) a full corp bond yield curve for the month preceding the plan year or 2) a 24 month average of three tier corp bond yields (0-5,5-20,20+) for up to 4 months preceding the valuation date. Those are mandated by statute (and bounded by map-21/hatfa rates)

Also under ERISA , 24-month asset smoothing is limited to the gains/losses measured at the third segment rate.

So PPA essentially mandates the economic and mortality assumptions used in funding valuations for private pensions.

For GAAP valuations, the plan sponsor can choose all assumptions subject to auditor scrutiny.

Edit: Here's a link to probably more than you want to know about this

http://www.octoberthree.com/news/art...ty-assumptions
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Old 08-25-2015, 12:14 PM   #23
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US Steel just froze its pension plan. I'm surprised by two things, one, that US Steel still exists, and two, that it's taken them this long.

I wonder what percentage of the F500 still offer traditional DB pensions?

8-K
As others have noted I believe 20% or less still over DB plans. It's probably less actually. At our Megacorp it was not offered to new hires 2009 and on. Our plan freezes at the end of this year.

What they did to help offset it is add a "new" 401K plan that the company will contribute an additional 9% of pay for 2016 and ramps down to 5% over time. This is on top of matching 6% on the first 8%.
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Old 08-25-2015, 01:28 PM   #24
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the first and last aren't assumptions used to value private pension obligations - for ERISA valuations the second is statutory - for GAAP valuations most have moved to the 2014 2D mortality table or a variation thereof
I was referring to the underlying economic assumptions impacting long-term pension affordability, not those used for ongoing regulatory valuation of pension obligations. But my wording could have better. I'm quite sure the latter is flawless.

In any case, my main point about refocusing retention resources and changing compensation philosophy is something I don't see written about a lot in the context of the demise of traditional DB pensions. This is usually attributed to demographic shifts which adversely affect affordability. But it seems to me, if corporations wanted to preserve the compensation philosophy of pensions and their universal retention effect, yet make them more affordable, there's a path toward that end (increased retirement age, COL adjustments, etc). Not popular with employees, no doubt, but there's a path nonetheless.

But that's not the path chosen by most corporations. Perhaps Koolau is right and the employer/employee relationship had already transitioned to such a fluid state, that corporations were merely providing a more "portable" retirement option, which would be more suitable (and thus valuable) for such transient employees. Having been a quasi-insider into this dilemma for one specific Megacorp, I can tell you that was not the intent in our case. It was to remove a fixed and growing element of compensation expense that benefited all employees more-or-less equally, and instead redirect those dollars to the specific employees, which the company desperately wanted to retain for long-term competitiveness.
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Old 08-25-2015, 02:01 PM   #25
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I was referring to the underlying economic assumptions impacting long-term pension affordability, not those used for ongoing regulatory valuation of pension obligations. But my wording could have better. I'm quite sure the latter is flawless.

In any case, my main point about refocusing retention resources and changing compensation philosophy is something I don't see written about a lot in the context of the demise of traditional DB pensions. This is usually attributed to demographic shifts which adversely affect affordability. But it seems to me, if corporations wanted to preserve the compensation philosophy of pensions and their universal retention effect, yet make them more affordable, there's a path toward that end (increased retirement age, COL adjustments, etc). Not popular with employees, no doubt, but there's a path nonetheless.

But that's not the path chosen by most corporations. Perhaps Koolau is right and the employer/employee relationship had already transitioned to such a fluid state, that corporations were merely providing a more "portable" retirement option, which would be more suitable (and thus valuable) for such transient employees. Having been a quasi-insider into this dilemma for one specific Megacorp, I can tell you that was not the intent in our case. It was to remove a fixed and growing element of compensation expense that benefited all employees more-or-less equally, and instead redirect those dollars to the specific employees, which the company desperately wanted to retain for long-term competitiveness.
good points - one huge constraint is that Normal Retirement Age (the age you get the full accrued benefit) can't be later than age 65 under current regulations. Contribution/expense volatility is an issue that's easily dealt with through plan design and asset allocation.
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Old 08-25-2015, 02:34 PM   #26
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I see the trend toward freezing of pensions as the shifting of risk from the company to the employee. People living longer creates a change in the longevity risk the administrators have to address. The low interest rate of bonds as a stabilizer against the stock market volatility makes the company obligation more open ended.
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Old 08-26-2015, 08:31 PM   #27
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My impression is that lump sums are rarely worth taking versus DB, unless company is shaky.
That seems to be the feeling of many of my friends, but with a likely short lifespan for both DW and I, we've been looking at lump sum as a way to have an inheritance for our offspring.

I've run the numbers through FireCalc both ways, and was surprised at the result. Staying with a 30 year planning horizon (hey, they could find a cure someday soon!) I found that the pension plus current portfolio left me with $93K and the lump sum plus portfolio would be at $340K after 30 years.

Seems lump sum has a significant chance to outperform a pension (for me). I think it is because the pension is non-cola.

I'm leaning heavily toward lump sum, but of course I have different circumstances than some. I've got 1 year, 4 months and 5 days to continue sharpening the pencil!
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Old 08-28-2015, 09:02 AM   #28
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I see the trend toward freezing of pensions as the shifting of risk from the company to the employee. People living longer creates a change in the longevity risk the administrators have to address. The low interest rate of bonds as a stabilizer against the stock market volatility makes the company obligation more open ended.
At my megacorp, the pension changes happened in two stages. First, they froze the plan to new hires and gave current employees an option to stay in the traditional DB plan, or receive a lump sum and transition to 100% 401k for the future. The only way leaving made financial sense was if you believed that you were very likely to leave the company before retiring. Otherwise, all the calculators showed that we were much better off staying in the DB plan. I elected to stay.

About 5 years later (after 2009), they decided that freezing the plan to new participants wasn't good enough, so they kicked out any current employee who was less than 40 years old AND set a future date that the plan would be frozen for all participants. I made the cut and they'll freeze the plan the year I turn 55, so they set a nice stretch goal for me

I believe my megacorp made these changes for three main reasons. First of all, offering a good DB pension plan became less important for recruiting new employees as the number of companies with DB plans declined. That allowed them to make the first change to close the plan to new participants. The second, and hopefully last, change they made because the accountants wanted it. Shifting the majority of the employees to a pure DC plan makes it much easier for the company to predict their future retirement obligations. In fact, they now vest the company match immediately, and kick in their extra bits at the end of the year, so it's all neat and tidy from an annual report perspective.

The final reason is easy; the DB plan costs more than the 401k, so cutting it saves the company money. By "costs more" I mean that I think the overall costs to the company per employee were higher than what they replaced it with in the 401k. I think the two big stock drops and the low bond rates contributed in no small way to their decision to essentially end our DB plan.
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