2014 Retirement Webinar Series

Transcription

1 2014 Retirement Webinar Series

2 Putting the Pieces Together Understanding Changes Affecting Pension De-Risking and Settlement Strategies Ari Jacobs, Chris Birch, Barb Hogg, Aon Hewitt Tami Kucera, USG Corporation

3 Pension Settlements: Why? Why Now? Today s agenda Understand what is prompting increased interest in pension settlements Share perspectives on what drives success Hear about a successful lump-sum window Respond to your questions PBGC Premiums Funded Status Mortality Basis 2

4 Funded Status has Improved Funded Ratio (based on the S&P 500) 1/1/14 91% 1/1/13 77% 7/1/13 85% 10/1/13 89% 4/1/13 82% Increase in funded status from the end of 2012 through mid-march 13% Source: Aon Hewitt Pension Risk Tracker, 3

5 People are Living Longer Society of Actuaries proposed new mortality tables in February 2014 IRS could require the new tables as early as 2016 Life expectancy of a person age The 1980s The 1990s The 2000s Today: Old Basis Male Female Today: New Basis In 15 Years Estimated increase in lump sum for a 45-year-old participant 5%- 12% Note: Assumes December (e) interest rates 4

6 Carrying Costs are Increasing The Bipartisan Budget Act of 2013 contains significant PBGC premium increases Second major premium increase in the last two years (MAP-21) (projected) Flat rate (per person) Variable rate (per $1K unfunded) $49 $64 $80 $14 $29 $36 Present value of future PBGC premiums for a 45-year-old participant Note: Recognizes flat rate premiums only $1,500 Note: Assumes December (e) interest rates and 2.3% inflation 5

7 Plan Sponsor Interest

8 Settlement Strategies Gaining Traction Lump-Sum Window Annuity Purchase Plan sponsor reporting in late % completed recently + 14% very likely to do in % completed recently + 3% very likely to do in 2014 Source: Aon Hewitt 2014 Hot Topics in Retirement 7

9 Settlement Strategies Gaining Traction Lump-Sum Window Annuity Purchase Plan sponsor reporting in late % completed recently + 14% very likely to do in % completed recently + 3% very likely to do in 2014 Updates in March % planning to run a lumpsum window in next 2 years + 43% not sure, but considering 5% planning to purchase annuities in next 2 years + 26% not sure, but considering Source: Aon Hewitt 2014 Pension De-Risking Pulse Survey 8

10 Plan Sponsors Planning a Lump-Sum Window Influence of PBGC premium increases and proposed mortality tables on decision making 18% Decided to move forward 13% Expanded the eligible group 3% Accelerated timing Source: Aon Hewitt 2014 Pension De-Risking Pulse Survey 9

11 Influences on Plan Sponsor: Barriers Lump-Sum Window Accounting Cash impact Funded status Interest rates Ongoing feature Staff time 32% 32% 29% 28% 26% 20% Source: Aon Hewitt 2014 Pension De-Risking Pulse Survey 10

12 Influences on Plan Sponsor: Barriers Annuity Purchase Annuity cost Accounting EE reaction Process Unions Other 72% 34% 33% 23% 20% 15% Source: Aon Hewitt 2014 Pension De-Risking Pulse Survey 11

13 Lump-Sum Window Considerations

14 Variations on a Theme Typical lump-sum window Offer to all the terminated vested participants or a subset (ex: up to a $ limit) One-time opportunity Limited period (the window ) Other approaches to lump sums Small amount sweeps Permanent feature (perhaps with $ limit) Participant reminders (if lump sum available) Retiree windows 13

15 What Does a Lump-Sum Offer Mean? For the sponsor For the individual Liability of $13,200 PBGC premiums and administrative costs: Present value of $1,900 to $3,000 Expected liability increase of $700 to $1,600 from proposed mortality tables Plus associated pension risk Male Age 45 Pension: $300/month at age 65 No longer employed by plan sponsor Lump sum of $13,200 instead of $300/month in 20 years Ability to consolidate retirement savings Voluntary! Note: Assumes December (e) interest rates and 2.3% inflation 14

16 Plan Sponsor Experience Lump-Sum Election Percentage by Plan Sponsor Windows in 2013 Windows in % 25% 50% 75% 100% Lump-Sum Elections 54% On average 46% Dollar weighted Direct Rollovers 55% of lump sums 68% of eligible dollars Source: Data from 57 lump-sum windows covering approximately 250,000 participants, See Aon Hewitt s 2013 whitepaper Pension Settlements Through Lump-sum Windows for additional information. 15

17 Getting a Response: Process Matters Preparation + Participant Interaction = Positive Outcomes Election percent Financial impact Informed participants Compliance Reduced risk Very little noise 16

18 Getting a Response: Process Matters Preparation Preparation + Participant Interaction = Positive Outcomes Search for participants Clean up data Calculate accrued benefits Clarify objectives Receive buy-in Estimate financial impacts Consider impact of decisions Involve counsel Determine go/no go date Build a detailed project plan Plan for reporting needs Prepare for needed liquidity In general Business case Design Coordination 17

19 Getting a Response: Process Matters Participant Interaction Preparation + Participant Interaction = Positive Outcomes Mailings Announcements Election materials Reminders Service Center Answer questions Process elections Make outbound calls Other Resources Multi-channel elections Financial guidance Alternative touchpoints 18

20 USG Corporation Implements Successful Lump-Sum Window Tami Kucera, Senior Manager, Employee Benefits

21 Background Company with 100+ year history Headquarters in Chicago, IL Manufacturer and distributor of building materials for the construction and remodeling industries Leading manufacturer and distributor of wallboard, joint compound and related products in North America Global leader in the manufacturing of ceiling suspension systems and recognized as the premier acoustical panel and specialty ceiling systems innovator Union-free manufacturing facilities Rich history of innovation with more 1,100+ patents 20

22 USG Retirement Programs Pension plan with employee contributions Hired through 2010 Final average pay pension plan Hired in 2011 or later Cash balance plan At retirement At termination At retirement or termination Lump sum or annuity Note: About 80% of retirees take the lump-sum payment No lump-sum option Return of employee contributions only Lump sum or annuity 21

23 Deciding to Offer the Lump-Sum Option Considerations in making a lump-sum offer Funded status Well-funded pension USG often contributed more than minimum Future costs Save on PBGC premiums (including increases) Avoid cost increases due to new mortality basis Population Focus window on terminated vested participants without a lump-sum option About 4,200 total 22

24 Lump-Sum Window Outreach 1 Announce 2 Inform 3 Remind Introduce opportunity Request address verification for those without verified address (about 30% received a separate version) Inform term vesteds of lump-sum amount Provide education around options Describe how to make an election Send two reminders about the window Make calls to those who had started and not completed process 23

25 Expectations Met and Then Some 45% participated in the window representing $67M in lump sums 97% chose the lump sum; 3% elected an annuity payment 58% participated among those with a verified address 4% started, but did not complete the election process 24

26 Questions & Answers

27 Contact Us Ari Jacobs Global Retirement Solutions Leader Aon Hewitt Chris Birch Associate Partner Aon Hewitt Barb Hogg Partner Aon Hewitt 26

28 About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit Aon plc This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt's preliminary analysis of publicly available information. The content of this document is made available on an as is basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document. 27