SHEET METAL WORKERS NATIONAL PENSION FUND 8403 Arlington Blvd., Suite 300 Fairfax, VA 22031 800-231-4622 info@smwnbf.org TWO ANNOUNCEMENTS ABOUT IMPORTANT DEVELOPMENTS AT THE NATIONAL PENSION FUND October 2013 By Electronic Publication Dear Participants, Local Unions and Contributing Employers: This is an announcement of two major developments at the National Pension Fund. Please note: if you are already retired, the changes described in these two announcements will NOT affect your benefits. The first announcement describes the new benefit accrual formula that will be used to calculate a Participant s Normal Retirement Pension benefit for each hour worked in Covered Employment on and after January 1, 2014. The second announcement explains that the Fund's zone status under federal law might be improving and what this could mean for benefits. We strongly encourage all Participants, Local Unions, and Employers to read both announcements in full. - THE BOARD OF TRUSTEES FIRST: Change in the Benefit Formula The Variable Benefit Accrual Rate (VBAR) Takes Effect January 1, 2014 The Sheet Metal Workers National Pension Fund ( NPF or Fund ), like all institutional investors, has experienced enormous fluctuations in investment returns since the start of this century. The NPF Trustees constantly monitor the Fund s investment portfolio to enhance returns. Nevertheless, the volatility in investment markets is inescapable. Many experts say that the market s ups-and-downs are the new normal. To protect and improve the Plan s funded status over the long term, beginning on January 1, 2014, the Plan s benefit formula (accrual rate) will be a Variable Benefit Rate Accrual, referred to as VBAR. The Plan Document has been amended to incorporate this new benefit formula, effective January 1, 2014. The VBAR formula will apply to contribution hours worked on or after January 1, 2014. Under the new VBAR benefit formula, the rate at which a Participant earns a benefit for each Hour of Work in Covered Employment will be based on the Fund s average market value investment return over a rolling three-year period, as reported by the Fund s actuary. Note that using a rolling three-year average may lessen the fluctuations that might occur if a year-by-year rate of return is used. Moreover, because this will be a Please read and retain for future reference. October 2013 Page 1
rolling three-year average, the VBAR benefit formula can change each year. There are illustrations starting on page 3. Each year, the Fund s actuary will report the average market value investment return for the three most recent years in the Fund s annual Actuarial Valuation and Review ( Valuation ). The Valuation usually is issued in the fall of each year and it is based on actuarial and Plan data as of the end of the preceding plan year (e.g., the January 1, 2013 Valuation is based on December 31, 2012 data). This means that, beginning in 2014, the VBAR accrual rate for each year will be based on the most recent three-year average market value investment return as reported in the Valuation as of January 1 of the preceding year. In other words, the 2014 accrual rate under the VBAR formula will be based on the investment returns for 2010, 2011, and 2012, since those are the most recent years reported in the January 1, 2013 Valuation. Similarly, the 2015 accrual rate under the VBAR formula will be based on the investment returns for 2011, 2012, and 2013, since those will be the most recent years reported in the January 1, 2014 Valuation. In sum, the VBAR formula will provide a benefit accrual as follows: IF, the three-year average market value investment return percentage reported in the preceding Plan Year s Actuarial Valuation and Review is: THEN, the VBAR rate of Accrual for the Plan Year will be: 10% or higher 1.25% 8.5% or higher, but less than 10% 1.0% 6.5% or higher, but less than 8.5% 0.75% Greater than 0%, but less than 6.5% 0.5% 0% or less 0% See below for adjustments to the VBAR rate for 55/30 Contribution Rates In an earlier communication, we indicated that VBAR would not apply to Collective Bargaining Agreements ( CBAs ) that participate under the Default Schedule, at least initially. Now, however, should the NPF s zone status change next year that is the Fund emerges from Critical Status (Red Zone) in 2014 - the VBAR formula will apply to persons who have or will work under the Default CBAs. Please read below the SECOND announcement for additional information regarding the possible change in the NPF s zone status for next year. Note also: If your CBA s Contribution Rate is a 55/30 Rate, the accrual will be 70% of the amounts listed above. The VBAR benefit formula will apply to all Contribution Hours in a Plan Year. Below is an illustration of how the VBAR formula will work in 2014. The January 1, 2013 Valuation shows that the average market value return percentage for the three years 2010, 2011 and 2012 was 8.25%. [14.48% (2010 Plan Year) + -1.72% (2011 Plan Year) + 11.98% (2012 Plan Year) 3 = 8.25%]. Because this 3-year average return is less than 8.5% but greater than 6.5%, the VBAR percentage for 2014 is 0.75%. Please read and retain for future reference. October 2013 Page 2
Illustrating the VBAR Formula in hypothetical examples. EXAMPLE 1: for a non-55/30 Contribution Rate in 2014 - Let say that Pete worked 1700 hours in Covered Employment during the 2014 Plan Year and his Employers were required to contribute $4.00 per hour worked to the NPF. For 2014, Pete s Normal Retirement Pension benefit is determined as follows: Number of Hours of Work in Covered Employment Pete performed in 2014. 1700 x $4.00 x.75% = $51.00 This is the Contribution Rate which is also the Benefit Rate. Under VBAR, the average market return for 2014 is 8.25% and the Applicable Percentage is 0.75%. Monthly benefit Pete has earned payable at Normal Retirement Age (65) assuming he meets all eligibility requirements. EXAMPLE 2: for 55/30 Rate in 2014 - Let say that John worked 1700 hours in Covered Employment during the 2014 Plan Year and his Employers were required to contribute $6.00 per hour worked to the NPF. Also suppose, John s Local had adopted the 55/30 Pension. For 2014, John s Normal Retirement Pension benefit is determined as follows: Number of Hours of Work in Covered Employment John performed in 2014. This is the Contribution Rate. It is a 55/30 Rate, so the Benefit Rate is 70% of the Contribution Rate. $6 x 70% = $4.20 1700 x $4.20 x.75% = $53.55 Under VBAR, the average market return for 2014 is 8.25% and the Applicable Percentage is 0.75%. Monthly benefit John has earned payable at Normal Retirement Age (65) assuming he meets all eligibility requirements. At this time, it is expected that the VBAR formula will apply to all Participants working in Covered Employment during 2014. This assumes, as explained in the SECOND announcement below, that the NPF will no longer be in Critical Status in 2014. If the NPF does not emerge from Critical Status in 2014, then the VBAR will NOT apply to those Participants working under the Default Schedule while the Fund remains in Critical Status. For more information, go to the NPF website www.smwnpf.org; email the Fund Office at info@smwnbf.org; write to the address in the letterhead, or call 800-231-4622. Please read and retain for future reference. October 2013 Page 3
SECOND: The NPF s Zone Status under Federal Law May be Changing As you know, the NPF has been in Critical Status under federal law since 2008. It is possible, but not certain, that NPF s funded status could improve from Critical Status to Endangered Status in 2014. Here are some questions & answers, which outline this potential change. I am already retired, how will this affect my benefit? If you are already retired, the potential change in zone status will NOT affect your benefits. What is the National Pension Fund s zone status now (that is in 2013)? The Fund has been in Critical Status (sometimes called the Red Zone ) since 2008 and continuing through 2013. The NPF has been in Critical Status because, among other things, the actuary projected deficiencies in NPF s Credit Balance. The Credit Balance is a complex actuarial tool that tracks employer contributions versus the minimum required contributions under funding requirements of the Internal Revenue Code. The Credit Balance is one of the ways the actuary gauges funding from year to-year. If there is no excess in the Credit Balance or it goes negative, a pension plan like NPF will likely be in Critical Status. Because NPF has been in Critical Status, it has operated under a Rehabilitation Plan ( RP ). The RP and its Schedules have used a combination of Contribution Rate increases and benefit adjustments to help NPF emerge from Critical Status. The RP offered these schedules: the Default Schedule, the First Alternative Schedule and the Second Alternative Schedule. The Fund did briefly offer a third alternative schedule but since no bargaining parties have adopted that schedule, it is now withdrawn given the possible emergence into Endangered Status. How would NPF emerge from Critical Status? For a pension plan to emerge from Critical Status, the actuary must project that there will be no deficiency in the Credit Balance in the current year and in each of the nine years after that. Based on most recent investment performance through September 2013, and assuming that contribution dollars do not significantly decline (e.g., by a significant decline in hours or in the number of active workers), the actuary could project next year that NPF will not have a Credit Balance deficiency in 2014 or in any of the following nine years. The actuary will issue the zone status certification no later than March 31, 2014. Shortly thereafter, the Fund Office will notify all Participants, Local Unions, and Employers. So if NPF emerges from Critical Status, what is its status then? If the NPF is not Critical, what is it? Again, it is possible, but not certain that NPF could emerge from Critical Status and into Endangered Status (also referred to as the Yellow Zone ) in 2014. So far, this year the Fund s investment return has been solid. The investment return for 2013 has been over 13% as of September 30, 2013. Please read and retain for future reference. October 2013 Page 4
Be cautioned, however, a lot can happen in the last quarter of 2013. For example, developments in Congress may adversely affect investment performance. As of Monday morning, October 14, 2013, the federal shutdown has not ended nor has the debt ceiling been raised. This has caused a lot of volatility in financial markets which is likely to continue, at least until these issues are resolved. Still, if the investment performance does not suffer significantly and NPF does not lose a substantial number of active participants or suffer a significant decrease in the number of hours worked, NPF likely will emerge from Critical Status into Endangered Status in 2014. As NPF moves toward the end of the year, the Fund Office will issue updates via the website www.smwnpf.org. What difference does it make if NPF is in Endangered Status or Yellow Zone? First, should the NPF emerge from Critical Status, the RP and Schedules will cease to apply (but all benefit adjustments remain permanent); and, the Trustees will issue a Funding Improvement Plan (as required for plans in Endangered Status), which will supersede the RP and Schedules. Like the RP, the Funding Improvement Plan will offer one or more schedules. These are expected to be similar to the RP s current schedules. Some schedules will likely require Contribution Rate increases in order to continue earning subsidized early retirement benefits (there is a q & a below that explains this further). What is the purpose or goal of a Funding Improvement Plan? The purpose of the Funding Improvement Plan is to achieve a significant increase in the NPF s funded percentage. More precisely, the Plan s funded percentage at the end of the funding improvement period must go up by one-third of the difference between the starting funded percentage and 100%. The funding improvement period is a 10-year time period in which the NPF must increase the funded percentage as required. The funding improvement period generally starts within one or two years from the date the NPF enters Endangered Status. The period proceeding the funding improvement period is called the funding plan adoption period, and it starts on the date that the actuary certifies that the NPF is in Endangered Status. The Funding Improvement Plan will establish applicable benchmarks to gauge how the NPF is doing toward improving the funded percentage by the required one-third. The funded percentage is the Fund s actuarial value of assets over its liabilities. In general, the funded percentage is helped by higher contributions and investment performance that averages around 7.5% or higher. What will the Funding Improvement Plan schedules require? If the Fund emerges into Endangered Status, the law requires NPF to issue a schedule or schedules along the following lines: (1) One schedule would reduce the amount of future benefit accruals to the extent needed to emerge from Endangered Status that is to make annual progress to improve funding by at least one-third. This particular schedule would not require increasing contributions unless that was necessary in order for the NPF to emerge from Endangered Status; and (2) One schedule that requires increases in contributions necessary to make sufficient progress to emerge without reducing any future benefit accruals under the Plan. In other words, this schedule would provide that if an increase were made, current benefits under the Plan would not change. Please read and retain for future reference. October 2013 Page 5
The reference to future benefit accruals in (1) and (2) above generally means the amount of Normal Retirement Pension benefits or subsidized Early Retirement Pension benefits earned under the NPF. Note that subsidized Early Retirement Pension benefits are based on the amount of the Normal Retirement Pension benefit payable at Normal Retirement Age (age 65). Eliminating or reducing the amount of Early Retirement Pension benefits earned in the future has the effect of reducing future benefit accruals, but it does not reduce the amount payable at Normal Retirement Age. It does mean that you would be earning a smaller Early Retirement Pension benefit, should you elect to retire before Normal Retirement Age. Note further that for Participants currently participating under the RP s Default Schedule or for persons for whom contributions are not required to be made, subsidized early retirement benefits have already been eliminated. None of these schedules will reduce the amount of a Participant s Normal Retirement Pension benefit (the benefit payable at age 65) that was earned before the Funding Improvement Plan schedules take effect. Finally, any reduction in benefits under a Funding Improvement Plan schedule generally is limited to benefits earned on or after the date NPF enters into Endangered Status which is projected to occur in 2014. For example, if early retirement benefits were reduced under a Funding Improvement Plan schedule, the reduction would apply only for hours worked after the schedule took effect. Subject to all Plan Document terms and all eligibility requirements, the portion of the Early Retirement Pension earned before a Funding Improvement Plan schedule takes effect would remain unaffected. Once the bargaining parties (that is Local Unions and Employers) receive Funding Improvement Plan schedules, they should review them carefully. By law, NPF could issue schedules as late as December 2014 but the Trustees currently intend to issue schedules in the spring, assuming that the NPF enters Endangered Status in 2014. Are there other implications, particularly for Local Unions & Employers, of being Yellow rather than Red? Note that should NPF enter Endangered Status (the Yellow Zone ), federal law dictates that the Trustees may not accept a collective bargaining agreement (or other agreement) that: provides for reduced NPF contributions for any participant, and/or suspends NPF contributions for any time period (like a new probation period) and/or excludes directly or indirectly younger or newly hired employees from NPF participation and contributions. In general, these legal restrictions mean that any effort by the bargaining parties to put these kinds of provisions into a CBA in 2014 or thereafter would not be possible. In addition, when adopting a schedule the bargaining parties are strongly urged to choose carefully and view the decision as irrevocable. Once the bargaining parties select a schedule, it may be impossible or very difficult to change. Also, as is currently the case in Critical Status, the NPF is restricted from making any benefit improvements. Please read and retain for future reference. October 2013 Page 6
Will the VBAR formula described above change, if NPF ends up staying in Critical Status? As stated above, if the NPF enters Endangered Status the VBAR formula will apply to all Participants. If the Fund remains in Critical Status, the VBAR formula will not apply initially to persons under the Default Schedule. Where can I get more information? Go to the NPF website www.smwnpf.org; email the Fund Office at info@smwnbf.org; write to the address in the letterhead, or call 800-231-4622. Please read and retain for future reference. October 2013 Page 7