The Markets August 15, 2014

Largest Corporate Pensions Lost Ground in July

The funded status of the largest corporate defined benefit (DB) pension plans decreased by $5 billion during July, according to data from Milliman, Inc.
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The Milliman Pension Funding Index (PFI) tracks the nation’s 100 largest corporate-sponsored defined benefit pension plans and is updated monthly. During the month of July, these plans experienced a $3 billion decrease in pension liabilities and an $8 billion decrease in asset values, resulting in a $5 billion increase in the pension funding deficit.

By the end of June, the deficit rose to $257 billion, primarily due to declines in equity and fixed-income returns. As of July 31, the funded ratio declined marginally to 85.0%, down from 85.3% at the end of June.

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The projected benefit obligation (PBO) decreased by $3 billion, lowering the Milliman 100 PFI liability value to $1.708 trillion, down from $1.711 trillion at the end of the previous month. The PBO change resulted from an increase of two basis points in the monthly pension contribution discount rate, which reached 4.10% for July, up from 4.08% in late June. July marked the second consecutive month where the discount increased. Rising discount rates have the effect of lowering the amount of contributions required today to fund benefits years down the road, Milliman explains. 

The market value of assets held by the Milliman 100 pension plans decreased by $8 billion as a result of July’s investment loss of -0.24%. As a result, the Milliman 100 PFI asset value decreased to $1.451 trillion, down from $1.459 trillion at the end of June.

From August 2013 to July 2014, the Milliman 100 PFI funded status deficit has worsened by about $36 billion. The drop in funded status over the past 12 months is primarily due to the decline in interest rates. Since July 31, 2013, the discount rate has dropped 63 basis points, to 4.10% from 4.73%. The funded ratio of the Milliman 100 companies has decreased over the past 12 months to 85.0% from 86.0%.

The results of the Milliman 100 Pension Funding Index are based on the actual pension plan accounting information disclosed in the footnotes to the companies’ annual reports for the 2013 fiscal year (and for previous fiscal years).

More information about the July index findings can be viewed here.

Compliance August 15, 2014

Guidance Issued on Tax Prepayment in PR Plans

The Puerto Rico Treasury Department has issued guidance on tax prepayment windows for retirement plans, according to a brief from the Groom Law Group.
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The guidance, known as Administrative Determination No. 14-16 (or AD 14-16), addresses ambiguities in provisions of Puerto Rico’s Internal Revenue Code (PR Code) and provides a window period for the prepayment of Puerto Rico income taxes on retirement account balances and accrued benefits under qualified and nonqualified retirement plans.

Specifically, the guidance relates to ambiguities in the Tax System Adjustment Act, or Act 77-2014, which amended the PR Code to give plan participants a window from July 1 to October 31 to voluntarily prepay the Puerto Rico income taxes on their accumulated and undistributed plan account balances. The new AD 14-16 clarifies that this prepayment may be made on all or part of both the participant’s account balance in the case of a defined contribution plan or the present value of the participant’s accrued benefit in the case of a defined benefit pension plan. In addition, the election to prepay may be made on a per plan basis in the case of participation in more than one plan.

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The AD also clarifies that an 8% tax rate is applicable for the prepayment in the case of plans qualified under the PR Code, and a 15% tax rate is applicable for nonqualified plans. For purposes of the prepayment, AD 14-16 provides that a qualified plan includes plans that have been submitted with the PR Treasury for qualification under the PR Code as of the time the prepayment is made.

The brief explains that prepayments may be made with the participant’s own funds or with funds distributed from a plan, and cannot exceed the participant’s account balance or accrued benefit as of the date the prepayment is made.

The brief also notes that according to AD 14-16, a plan is not required to either keep track of the prepayment or allow distributions from the plan for the prepayment. This means the plan fiduciaries have not only the discretion whether to allow distributions from a plan for the prepayment, but also the discretion whether to maintain or not maintain recordkeeping of the prepayments.

Plan fiduciaries should also note that allowing distributions from a plan for the prepayment will most likely require a plan amendment. However, AD 14-16 provides that such an amendment would not be considered a qualification amendment and would not be required to be filed with the PR Treasury, and the PR Treasury will not be issuing any determinations with respect to such amendments.

The brief also touches upon prepayment by the plan participant, prepayment by the plan, tax treatment of the prepayment, distributions during the window period, and a no-prepayment tax refund.

As for what fiduciaries of plans in Puerto Rico should do now, the brief explains that they must decide if the plan will keep track of any prepayments elected by plan participants. Before making such a determination, a plan sponsor must first confirm that the plan, or its provider, would be able to maintain such tracking. If the answer is yes, then procedures must be established on how to comply with the requirements of AD 14-16. A determination must also be made as to whether a plan amendment would be required.

In addition, a notice about the prepayment, and the related PR Treasury and any operational plan rules (including instructions for distribution requests), should be provided to participants.

A copy of the Groom Law Group brief on AD 14-16 can be found here.

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