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Bringing PPA to Life
Session 51

Moderator: Patricia A. Rotello, Watson Wyatt Worldwide
Presenters: Maria M. Sarli, Towers Perrin; Heidi Rackley, Mercer
Recorder: Michael Altilio, Watson Wyatt Worldwide

Now that the Pension Protection Act of 2006 (the “PPA”) is a reality, how do we as consultants tie it all together with our clients while attempting to avoid the common pitfalls waiting for us?

Funding Strategy
Under PPA, companies are now faced with new issues to consider while planning a funding strategy. The top four drivers are benefit restrictions, PBGC variable-rate premiums, participant disclosures, and avoiding 4010 filings which is a new concept for many companies.

Due to the accelerated certification requirement (three months after the beginning of the plan year to avoid the mandatory 10% decrease of the prior year funded percentage), third party administrators will be challenged to provide data in a timely manner while consulting firms will be faced with the task of completing valuation results sooner. The panel noted that some clients are collecting additional data on October 1 (for calendar year plans) to combine FAS and funding needs via a roll forward of liabilities to 12/31. Other companies who have been accustomed to contributing the minimum each year are also changing their funding strategy to accelerate funding to avoid benefit restrictions. Finally, consulting firms expect extra analysis at the end of 2007 to determine if it is appropriate to forfeit a credit balance to achieve a higher funded percentage. The panel has found that most companies would rather forfeit a credit balance instead of paying additional cash.

Lump Sum Payments Under PPA
The biggest question in the session was if the change in the calculation of lump sum payments under 417(e) will require a 204(h) notice. When the audience was polled, only a few stated that they have clients prepared to make the notification. There are conflicting reports about whether a 204(h) notice is required. Clients may be granted relief for a one year transition period. One panelist heard that an amendment to preserve GATT removes any 411(d) issues.

Plans close to the 80% target percentage that will be subject to partial lump sum restrictions may experience a “run on the bank” for lump sums once the restriction is lifted. This could drain assets and put the plan right back into the restricted lump sum status.

It was discussed whether plans without lump sum options should add them under PPA. By 2012, most plans will be near 100% funded and may choose to add the lump sum option to mitigate post retirement mortality risk. However, due to the improved funded status of the plan, it may also be a good time to terminate the plan if economically feasible.

Considerations for Actuaries Making FTAP Certification
During the first nine months of a plan year, actuaries can make a “range certification”. Actuaries could make multiple certifications in a plan year if circumstances change, however, the plan could be disqualified if the change is material. So when does a plan recertify if not material? For example, if a data change results in a 1% change in liability, do you recertify? Actual timing of the certification is also unclear. Is there an obligation to certify as soon as possible? One panelist felt that the IRS may never precisely answer these questions. Actuaries, plan sponsors, and participants all have different (selfish) interests in the timing of the certification.

Other PPA Challenges
There is no “safe” answer to: Is there a fiduciary duty to disclose impending benefit restrictions? There could always be potential lawsuits stemming from fiduciary decisions.

Frozen plans with heavy equity investment and good asset performance should be fully funded before seven years. It is important for consultants to discuss asset hedging or immunization with clients to avoid investment risk once plans are optimally funded.

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