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Old 10-21-2013, 01:10 PM
KSBurke KSBurke is offline
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Default Simple questions about pension plans

I've had some co-workers (P&C insurer) ask some me some questions about our defined benefit pension plan so I thought I'd run my basic understanding past you guys to see if I'm missing anything.

The company has a pension liability that is the present value of a bunch of annuities. The company funds the liability by setting money aside in a segregated account that can only be used to pay out benefits and can't be touched by bankruptcy courts. The minimum amount set aside is determined by a pension actuary. (Are the actuary's assumptions determined by the actuary or are they mandated by whoever regulates those things?)

When people retire and get a lump sum distribution the money comes out of the segregated account and, if the account drops below what the actuary says must be in it, the company must add money to the account. (How is the interest rate for the lump sum payment determined?)

From a layman's perspective, is this all there is to it?
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Old 10-21-2013, 01:18 PM
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ElDucky ElDucky is offline
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It sounds like you have a DB plan, but the lump sum comment doesn't make sense. They are meant to pay out a pension each month. I'm not sure about the US, but I think it is possible to take lump sums as well, with no further liability payable.

How the liability is calculated I couldn't say, as opinions vary on setting interest rates. The assumptions are set by company management, based on the advice of experts, including the actuary. The actuary will sign off on the assumptions if they are reasonable. There's a decent chance the rates are based on bond yields, but they can be higher than that, based on expected returns. Demographic assumptions would almost certainly just be whatever the actuary suggests.

In terms of adding money to the plan, if there isn't enough money, a schedule of payments will be established, which would in theory bring the plan back to a fully funded level over time.

The segregation of assets part is right; they are assets of the pension plan, not the company. I think there may be some mechanism to get at surpluses, but that's not too important.
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Old 10-23-2013, 07:54 PM
zeus1233 zeus1233 is offline
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OP:

- The US government has regulations which govern the assumptions used for minimum cash funding. They are, at the moment, rather smoothed. The actuary uses these to determine a minimum cash contribution. A plan sponsor can choose to contribute more than that (and many do)

- In the US, lump sums can only be paid if the plan satisfies certain funded status thresholds. In general, that test is performed on an annual basis (unless something significant occurs). Also, if it's a broad-based, tax-advantaged DB pension plan (i.e. what you probably think of as a pension plan) it has to offer lifetime annuity forms of payment which you are always allowed to commence regardless of the funded status fo the plan.

- The specifics of the lump sum calculation vary by plan. There is a government factor that is a "minimum" conversion factor to be used if you are converting a monthly annuity benefit into a lump sum. It varies with market interest rates. Note: if you have an "account based" benefit like a cash balance plan, where the benefit is always expressed as an account balance, this rule generally doesn't apply and the lump sum to be paid is simply the account balance.

- Don't forget that the plan is, in theory, backstopped by a quasi-governmental organization called the PBGC, which can step in if the plan sponsor is unable to continue funding the plan

That's the short of it
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Old 10-23-2013, 07:56 PM
zeus1233 zeus1233 is offline
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Quote:
Originally Posted by ElDucky View Post
It sounds like you have a DB plan, but the lump sum comment doesn't make sense. They are meant to pay out a pension each month. I'm not sure about the US, but I think it is possible to take lump sums as well, with no further liability payable.

How the liability is calculated I couldn't say, as opinions vary on setting interest rates. The assumptions are set by company management, based on the advice of experts, including the actuary. The actuary will sign off on the assumptions if they are reasonable. There's a decent chance the rates are based on bond yields, but they can be higher than that, based on expected returns. Demographic assumptions would almost certainly just be whatever the actuary suggests.

In terms of adding money to the plan, if there isn't enough money, a schedule of payments will be established, which would in theory bring the plan back to a fully funded level over time.

The segregation of assets part is right; they are assets of the pension plan, not the company. I think there may be some mechanism to get at surpluses, but that's not too important.
This must be Canada or some other place, because this does not at all describe US regulation.
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