The Consulting Actuary

Session 205 – PPA 2006 for Multiemployer Plans
Speakers: Lars C. Golumbic, James C. Shake
Recorder: Jessie Bunting

The Pension Protection Act of 2006 requires actuaries to issue annual actuarial certifications for multiemployer plans. The Multiemployer Plans Subcommittee of the Pension Committee of the American Academy of Actuaries has prepared a practice note providing guidance to actuaries preparing the actuarial certifications.

IRC Section 432(b)(3) Annual Certification by Plan Actuary

IRC Section 432(b)(3) requires the plan actuary of a multiemployer plan to certify to the Secretary and to the plan sponsor, not later than the 90^th day of each plan year:

· Whether or not the plan is in endangered or critical status for the plan year being certified, and

· In the case of a plan which is in a funding improvement or rehabilitation period, whether or not the plan is making the scheduled progress in meeting the requirements of its funding improvement or rehabilitation plan.

A multiemployer plan is in endangered status (Yellow Zone) for a plan year if the plan is not in critical status and is either:

Less than 80% funded, or
The plan is projected to experience an accumulated funding deficiency within 7 years taking into account any extension of amortization periods.

If both conditions are met, the plan is in seriously endangered status (Orange Zone).

The plan sponsor of a multiemployer plan in endangered status must adopt and implement a funding improvement plan to improve the plan funding over the next 11-18 years. The funding improvement plan must include a schedule with revised benefit structures, contribution structures, or both, which, if adopted, may reasonably be expected to enable the plan to meet the applicable benchmarks. Failure to make the required contributions on time under the funding improvement plan will require the employers to pay an excise tax.

A multiemployer plan is in critical status (Red Zone) for a plan year if either:

· The plan is projected to become insolvent within 5 years (7 years if funded percentage < 65%),

· The plan is projected to experience an accumulated funding deficiency within 4 years (5 years if funded percentage < 65%) ignoring amortization extensions, or

· Contributions < (Normal Cost + Interest on Unfunded Actuarial Liability [UAL]), Present Value of Vested Benefits (PVVB) for inactives > PVVB for actives, and the plan is projected to experience an accumulated funding deficiency within 5 years, ignoring amortization extensions.

The plan sponsor of a multiemployer plan in critical status must adopt and implement a rehabilitation plan to exit critical status over a 10-year rehabilitation period. Failure to make the required contributions on time under the rehabilitation plan will require the employers to pay an excise tax. An additional excise tax must be paid by the employers if they fail to make either the ultimate funding goal or annual funding goals three years in a row.

Multiemployer Certification under the Pension Protection Act of 2006 Practice Note

The actuarial certification for a multiemployer plan requires the actuary to project assets, liabilities, and the funding-standard account credit balance to determine if the plan is in endangered or critical status. The practice note issued by the Multiemployer Plans Subcommittee of the Pension Committee of the American Academy of Actuaries provides the following actuarial “best-estimate” projection guidance:

· Since audited financial statements are not available by the 90^th day of the plan year, the actuary should use the best information available at the time of the certification including: (1) unaudited financial statements, (2) actual cash flow items supplemented by the investment consultant’s estimate of the actual rate of investment return, and (3) a partial year roll-forward supplemented by actual cash flow items and index returns based on the portfolio mix for the remainder of the year. Applying the roll-forward to the market value of assets and calculating the actuarial value of assets from the market value will reflect a more realistic recognition of the gain or loss on the investment experience.

· For purposes of preparing the annual certification of the plan’s status, anticipated increases in contribution rates beyond those in current collective bargaining agreements would not be reflected. Contribution increases would be reflected in developing and monitoring a plan’s funding improvement or rehabilitation plan.

· Consistent assumptions should be applied to both the funding method liabilities for determining the credit balance and the unit credit liabilities to project future funded percentages.

· Roll-forwards of liabilities may be sufficient (subject to adjustments), although an open group forecast may be more appropriate in some cases.

· Projections would reflect the contribution rates in the collective bargaining agreement for the year of the certification, as well as increases scheduled in the current agreement to take effect in future years.

· Any change to benefits that are adopted after the first day of the plan year and prior to the certification may be taken into account in the actuarial certification. The impact of the change is prorated in accordance with Revenue Ruling 77-2.

· Changes in contributions rates occurring during the plan year but before the actuarial certification would customarily be reflected in the projections.

· If a future increase in the total wage/benefit package has been negotiated, but without specific reference as to how much will be allocated to the pension plan, the actuary generally would not assume any increase to the pension contribution.

· The certification should include (in addition to the requirements of IRC Section 432(b)(3)): (1) a description of how both plan liabilities and assets are projected to the certification date and for subsequent years, (2) the date the assets were valued and the source of plan assets, (3) the anticipated employer contributions for each year and the basis used to project contributions, (4) the projected amount of the credit balance during the forecast period, (5) any projected industry activity, including covered employment and contributions levels, and (6) any other anticipated changes during the forecast period that deviate from the original actuarial valuation or Schedule B used as the basis from the certification.