Aligning Fiduciary Duties with Pension Risk Management

Transcription

1 Aligning Fiduciary Duties with Pension Risk Management October 16, 2017 Mark Simons Of Counsel, Morgan Lewis & Bockius, LLP Russ Proctor, CFA, FSA, EA Director, Pacific Life Insurance Co. Marty Menin Director, Pacific Life Insurance Co.

2 Agenda Aligning Fiduciary Duties with Pension Objectives Working with Independent Fiduciaries and Other Intermediaries to Manage Plan Risk Solutions to Manage Pension Risk Solutions to Help Defined Contribution Participants Manage Longevity Risk

3 Fiduciary Duties for Qualified Plans

4 ERISA Fiduciary Duties What You Need to Know ERISA s fiduciary standards of prudence, exclusive benefit and diversification Requirement to follow written plan documents ERISA s conflict of interest and self-dealing prohibited transaction rules Key words: Procedural prudence, 95-1, fiduciary delegation, risk management and documentation

5 Working with Independent Fiduciaries and Other Intermediaries to Manage Plan Risk

6 Fiduciary Risk Management: Use of Independent Fiduciaries, Advisors and Other Intermediaries What does it mean to outsource fiduciary duties? Key words: OCIOs, outsourced named fiduciaries, 3(38) vs. 3(21) advisors What responsibilities remain? Selection and monitoring Other responsibilities are based on specifics contract terms are important What we re seeing

7 Managing Pension Risk

8 De-Risking Road Map Lump-Sum Retirees with Smaller Monthly Benefits 10% 20% Vested Terminated 40% 30% Active Retirees with Larger Monthly Benefits LDI or Insured LDI Buy-In Buy-Out

9 PRT Selection Process Selection of intermediaries Review of insurance companies (95-1) Final bid day Selection of insurance company or companies Transfer of participant data

10 PRT Increased Activity

11 Historical Sales $Billions $16 Terminal Funding and Buy-Outs ($B) $14 $12 $10 $8 $6 Excludes $33.6 B for GM and Verizon $4 $2 $ LIMRA Secure Retirement Institute Group Annuity Risk Transfer Survey, through December 31, 2016

12 Volatile Equity Market Environment 3000 S&P 500 Index - Jan 1995 to July 2017¹ S&P 500 is a registered trademark of Standard & Poor's Financial Services LLC. Index value at beginning of month.

13 Interest Rate Volatility 10YR T-Note yr T-Note - 5 Year History 2.45% at 6/30/ % 5-yr Avg July-12 July-13 July-14 July-15 July-16 July yr T-Note 5 Yr Avg Source: US Department of Treasury, June 30, 2017

14 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Funded Status ( $ billions) Funded Ratio (%) Pension Risk Market Environment Milliman 100 Pension Funding Index Pension Surplus/Deficit and Pension Funded Ratio Funded Status Funded Ratio Source: Milliman 100 Pension Funding Index, July 2017.

15 PBGC Premium Increases Flat Rate Premium (Per Participant) $90 $80 $70 $60 $50 $40 $30 $20 $10 $- $80 $74 $69 $64 $57 $49 $35 $ Premium rates, Pension Benefit Guaranty Corporation website. December 31, 2016

16 PBGC Premium Increases Variable Rate Premium (Unfunded Liability) 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 4.4% 3.9% 3.4% 3.0% 2.4% 1.4% 0.9% Premium rates, Pension Benefit Guaranty Corporation website. December, 2016 Assumes 3% annual increase in National Average Wages

17 Buy-Out

18 Buy-Out: Key Features Can cover part or all of the plan participants For Covered Participant Group: Transfers all pension obligations and risks to insurer Removes the pension liability from plan sponsor s balance sheet Plan sponsor no longer subject to PBGC premiums and other expenses Insurer provides all annuitant servicing

19 Liability (Cost) Case Study: Reducing Expense With a Buy-Out For illustrative purposes only. Economic Cost of Retiree Liability (Small Benefits) with RP % 5% 5% 3% 113% Annuity cost may be < 105% Direct Dollar Plan Sponsor Cost Indirect Dollar Plan Sponsor Cost Plan Sponsors Adopt RP2014 Mortality 1. Retiree GAAP Liability 2. Admin & PBGC Expenses 3. Investment Management 4. Investment Default Risk 1. Liability for accounting based on current market discount rate for retiree liability 2. Estimated administrative expenses including actuarial fees and PBGC fixed-rate premium of $80 per person 3. Estimated investment management fees (assumes 50 bps per year) 4. Estimated cost of defaults on high-quality bond portfolio (assumes 30 bps per year) 5. This is the true economic cost if the plan sponsor retained the liability 5. Retiree Economic Cost

20 Buy-In

21 Buy-In vs. Buy-Out: What is the Difference? Buy-In is similar to Buy-Out except: Settlement accounting? Contract value remains an asset of the plan/trust Change in plan s funded status? No communication required to participants Revocable? May be converted to Buy-Out

22 When Does a Buy-In Make Sense? Qualified Plans Underfunded plan Unrecognized losses Not ready to terminate Nonqualified Plans Defined benefit SERP

23 Buy-In Case Study #1: Delay Recognition of Settlement Loss Buy-In purchased in August 2015 Buy-In contract covered current retirees Converted to buy-out in April 2016 Settlement accounting triggered in 2016 at conversion Loss recognized in 2016 instead of 2015 Plan terminated in 2016 For illustrative purposes only.

24 Managing DC Plan Longevity Risk

25 How Long Will You Live? 50% Probability of living to future age from 65 Male 22 Years Age 87 Female 25 Years Age 90 Source: Society of Actuaries. RP2014 and MP 2014, October 2014

26 How Long Will You Live? 50% Probability of living to future age from 65 Male 22 Years Age 87 Female 25 Years Age 90 Last survivor of a couple 29 Years Age 94 Source: Society of Actuaries. RP2014 and MP 2014, October 2014

27 How Long Will You Live? 50% Probability of living to future age from 65 Male 22 Years Age 87 Female 25 Years Age 90 Last survivor of a couple 29 Years Age 94 20% Probability of living to age 100 from 65 Last survivor of a couple 20% chance of living > 35 Years Age 100 Source: Society of Actuaries. RP2014 and MP 2014, October 2014

28 Guaranteed 1 Lifetime Income Options for DC plan Few DC plans provide access to an annuity In Plan Out of Plan Rollover to IRA - Often only option May rollover entire account even though only portion used for annuity Retail annuities typically cost more than institutional annuities 1 Guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company.

29 Should More Money Stay in DC plan? New DOL fiduciary rule may reduce IRA rollovers by 50% According to The Cerulli Report US Evolution of the Retirement Investor 2016 Best interest of participant? IRAs have higher average expense ratio 0.71% IRA vs 0.54% 401(k) (Investment Company Institute) Good for DC plan More assets = lower average expense through economies of scale

30 Advantages of Guaranteed Lifetime Income Options in DC plan Plan can negotiate lower or no commissions Receive wholesale pricing Retain non-annuitized assets in plan lower average expense for participants

31 Fiduciary Duties of Guaranteed Lifetime Income Options in DC plan Communication Safety of Insurance company Offer more than one company? Administration/Coordination of quotes Recent Treasury and DOL guidance Role of outsourcing Portability

32 Questions?

33 Appendix

34 Biographies Mark Simons Mark is of counsel in the top-ranked benefits practice of Morgan, Lewis & Bockius LLP, with 27 years of experience in advising clients on matters related to qualified and non-qualified retirement plans. In particular, Mark advises plan sponsors on matters related to fiduciary governance and regulatory compliance under Titles I and II of ERISA, and has assisted a wide variety of corporate plan sponsors and related fiduciaries in de-risking their tax-qualified defined benefit plans. Russ Proctor, FSA, CFA, EA, MAAA Russ joined Pacific Life in 2011 as a director in the Retirement Solutions Division. He is responsible for consulting with companies to reduce and remove financial risk inherent in their pension plans through the Pacific Life buy-out, buy-in, and insured LDI solutions. Russ also works with companies who have defined contribution plans, such as a 401(k) or 403(b) plan, to provide guaranteed lifetime income options for plan participants. Prior to joining Pacific Life, Russ was a retirement consultant with more than 24 years of experience, most recently as a principal with Mercer Human Resource Consulting. He provided strategic retirement consulting on all aspects of pension, 401(k), and executive retirement plans. He also conducted asset-liability modeling studies for clients and coauthored several articles including one on Liability Driven Investing. Russ holds a Bachelor of Science degree in actuarial science from Drake University. He is a Fellow of the Society of Actuaries (FSA), a Fellow of the Conference of Consulting Actuaries (FCA), an Enrolled Actuary (EA) and a Member of the American Academy of Actuaries (MAAA). He is also Chartered Financial Analyst Charterholder (CFA).

35 Biographies Marty Menin Marty joined Pacific Life in 2012 as a director in the Retirement Solutions Division. He is responsible for consulting with companies to customize solutions that solve the financial risk inherent in their pension plans through the Pacific Life suite of pension-risk products. Marty also works with companies who have defined contribution plans, such as 401(k) or 403(b) plans, to provide guaranteed lifetime income options for plan participants. Prior to joining Pacific Life, Marty held a variety of positions in the insurance and employee benefits industry for firms such as Prudential, Mullin/TBG, Marsh & McLennan, Merrill Lynch, and MetLife. Marty holds a Bachelor of Science degree in mathematics and economics from University of California, Los Angeles.

36 This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor or attorney. Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products. Only an advisor who is also a fiduciary is required to advise if the product purchase and any subsequent action taken with regard to the product are in their client s best interest. Insurance products are issued by Pacific Life Insurance Company in all states except New York. Product availability and features may vary by state. Pacific Life is solely responsible for the financial obligations accruing under the products it issues. rantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Pacific Life Insurance Company Institutional & Structured Products 700 Newport Center Drive Newport Beach, CA (877) , Option 1 GroupAnnuitiesBid@PacificLife.com