Cash Balance Pension Plans and Older Workers - Aarp

IB78 CASH BALANCE PENSION PLANS AND OLDER WORKERS Introduction This Issue Brief discusses issues related to cash balance plan design in the context of both traditional defined benefit (DB) pension plans and 401(k) plans—the most prevalent type of defined contribution (DC) pension plan. Cash balance pension plans combine features of both DB and DC pension plans. How to protect the pension benefits of older workers and whether cash balance plans discriminate against older workers are key issues in the current public policy debate about cash balance plan conversions. What Is a Cash Balance Pension Plan? Because a cash balance pension plan combines features of both a DB and a DC pension plan (Table 1), it is often referred to as

a “hybrid” pension plan (Coronado and Copeland 2003). Pension law, however, treats it as a DB pension plan because the plan specifies a monthly benefit at retirement. Cash balance plans have generally originated from conversions from traditional DB plans. They usually have not been started independently as new plans (U.S. General Accounting Office 2000). Two important attributes of a cash balance plan are: (1) hypothetical or notional individual accounts—a DC feature, and (2) a formula for determining benefits at retirement—a DB feature. Individual Accounts. Unlike a traditional DB pension plan, a cash balance plan provides workers with hypothetical or notional individual accounts (Table 1). Like traditional DB plans, workers are automatically enrolled in cash balance plans. Also like traditional DB plans, cash balance plans are insured by the Pension Benefit Guaranty Corporation. In a cash balance plan, each participant’s account is periodically credited with a dollar amount by the sponsoring employer, usually based on a percentage of the individual’s salary. Although a cash balance plan portrays benefits to employees in the form of an “individual” account, the cash balance account does not depend on the performance of plan assets. Contributions and investment earnings are not actually allocated to individual accounts; instead, contributions are made to a common trust fund for all participants, and benefits are paid directly from the fund. Cash balance plans are similar to 401(k) plans in that they are communicated to workers in terms of a balance in an individual account, they are readily portable, and their benefits are based on earnings over the entire period of participation in the plan. Benefit Formula. The cash balance pension formula determines benefits as a function of wages, pay credit rates, and interest credit rates. Contributions credited to the employee’s account by the employer (pay credit) are generally quoted as a given percentage of the employee’s pay. Interest credits equal to the product of the employee’s credited account balance times an interest credit rate are also accrued in the account (Chart 1). An interest credit rate is either a fixed rate or a variable rate tied to an index, such as the 30-year Treasury bond rate, or the rate on one-year Treasury bills reset every six months. According to the Bureau of Labor Statistics (BLS), the average annual employer contribution rate, i.e., pay credit, to cash balance accounts was 5.9 percent in 1997. The average rate of interest (annual interest...

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ReseARCh BRief - Public Affairs Research Council of Louisiana

Governor’s Cash-Balance Plan Offers Advantages But Questions Remain About Its Ultimate Impact The governor is proposing a set of changes to Louisi- For taxpayers, the governor’s proposed cash-balance ana’s pension programs for the purpose of reducing the retirement plan aimed at new state employees

poten- state’s retirement costs and the burden of pension liabilitially brings several distinct advantages over Louisiana’s ties. Among these initiatives is a proposal to offer a cash- current defined benefit system. The main benefit could balance plan for new hires that over time would replace come in the form of long-term cost savings from guaran- the existing defined benefit plan as the primary retire- teeing only the interest gained on employee retirement program for most state accounts. The state would not be promising a greater The proposed workers. This report examines benefit than the gains achieved in the financial markets, cash-balance plan the state’s unfunded accrued thereby reducing the risk of accumulating unfunded would replace liability and the potential im- liabilities. However, under a cash-balance plan, em- pacts of the cash-balance plan employees are protected in that their retirement accounts the existing defined on the state and its employees. cannot lose value. This protection runs a financial risk for benefit plan as the the retirement systems. Actuarial estimates vary as to Most Louisiana government primary retirement whether the plan would offer cost savings to the state. workers and teachers are en- program for new rolled in a defined benefit plan, The cash-balance plan would not use the current system state workers. in which employees receive a tem’s “final pay” formula, which leads to salary spiking guaranteed monthly income and other bad effects. For some employees who do not for the rest of their lives after they retire. The income spend their full careers in government service, the cash- is based on a formula that includes the number of an balance plan offers the advantages of portability and employee’s years of service and the average salary of under some scenarios provides the employee’s highest-earning years, which are usually a better financial package. Actuarial estimates the last few years before retirement. The formula -- not Decision makers should design vary as to whether the the performance of the retirement system investment the program to provide em- plan would offer cost portfolio -- determines the guaranteed benefits. ployees a fair level of retirement savings to the state. Traditional defined benefit plans can be attractive to benefits based on realistic ex- long-term employees and are considered by many to pectations, especially considering the fact that Louisi- be an effective recruitment tool for government service. ana’s state government workers are not participating in...

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Cash Balance Plan Design - July | Business Services

Maximizing Tax Deductions and Retirement Plan Contributions with a Cash Balance Plan Blake Willis, C.P.A. Partner and Chief Consulting Officer July Business Services Our Path Today • Why Cash Balance? • How Does it Work? – Examples • Best Candidates • How to Get Started 2 WHY CASH BALANCE 3 Cash Balance Plan Advantages This is a hypothetical example dependent on specific assumptions and used for illustrative purposes ONLY. Plan is assumed to have PBGC coverage, otherwise combined plan limits may apply. Full amounts may not be deductible in the first plan year.

5 Cash Balance Plan Advantages Increases • Benefit statements are participants’ easier to understand. understanding of their • Annual increases in benefit benefit amount are clear. 6 Cash Balance Plan Advantages Flexibility in Plan Design • Set equal contribution credits for partners / owners • Exclude partners • Vary contribution levels by group • Ownership • Practice area 7 How does it work? 8 What is a Cash Balance Plan? • Hybrid Plan : – Technically a defined benefit plan. • Benefit is defined. • No investment risk to the participant. • Annual Contributions are required. • Assets are pooled. – Provides a lump-sum based benefit formula. • Looks like a profit sharing plan. 9 Cash Balance Vocabulary • Each participant has a hypothetical account . • That account grows each year with a – Contribution credit – Interest credit • Both the contribution credit and interest credit are specified by the plan document. 10 Cash Balance Plan Example Participant Data: Current Year Pay $150,000 Contribution Credit in Document 20% of pay Interest Credit Rate in Document 5% Hypothetical Account Balance at Beginning of Year $35,000 Contribution Credit $30,000 Interest Credit $1,750 Hypothetical Account Balance at End of Year $66,750 11 Plan Type Comparison Characteristic Traditional DB Cash Balance 401K / PS Contribution Levels? Not limited Not limited Limited to $55,500 Who Bears Investment Risk? Plan Sponsor Plan Sponsor Employee Direction of Investments? Pooled Pooled Individual / Pooled Participant Accounts? No Hypothetical Yes Are Contributions Yes Yes No, can be Required? discretionary PBGC Coverage Required? Sometimes Sometimes No Retirement Benefit Formula? Annuity Lump Sum N/A 12 How should Assets be Invested? If Actual Investment Return is Higher than Interest Credit Rate (ICR) ICR 13 How should Assets be Invested? If Actual Investment Return is Higher than Interest Credit Rate (ICR) ICR Amount of Required Contribution Decreases 14 How should Assets be Invested? If Actual Investment Return is Lower than Interest Credit Rate (ICR) ICR Amount of Required Contribution Increases 15 EXAMPLES 16 Cash Balance Plan Example 1 One Owner Plans at Different Ages EE...

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Credit Risk New Approaches to Value at Risk and Other Paradigms

Credit Risk New Approaches to Value at Risk and Other Paradigms Second Edition ANTHONY SAUNDERS LINDA ALLEN John Wiley & Sons, Inc. measurement saun_fpref.qxd 2/7/02 10:44 AM Page vi Credit Risk measurement saun_ffirs.qxd 2/7/02 10:37 AM Page i Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Aus- tralia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk

management, financial engineering, valuation and fi- nancial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com. saun_ffirs.qxd 2/7/02 10:37 AM Page ii Credit Risk New Approaches to Value at Risk and Other Paradigms Second Edition ANTHONY SAUNDERS LINDA ALLEN John Wiley & Sons, Inc. measurement saun_ffirs.qxd 2/7/02 10:37 AM Page iii Copyright © 2002 by Anthony Saunders and Linda Allen. All rights reserved. Published by John Wiley & Sons, Inc., New York. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4744. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail: PERMREQ@WILEY.COM. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional person should be sought. This title is also available in print as ISBN 0-471-21910-X. Some content that appears in the print version of this book may not be available in this electronic edition. For more information about Wiley products, visit our web site at www.Wiley.com fcopyebk.qxd 2/28/02 10:05 AM Page IV v preface to second edition I t is quite astonishing that the state of the credit risk measurement art has progressed so far in just two years. Many of the models are entering their second generation. A consensus has developed about certain model param- eters and approaches. As is perhaps inevitable for a maturing body of knowledge, two schools of thought have emerged. One “school” traces its intellectual roots to Merton’s options theoretic approach and explains de- fault in structural terms related to the market value of the firm’s assets as compared to its debt obligations. The other “reduced form school” statisti- cally decomposes observed risky debt prices into...

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The Benefits of Cash Balance Plans - Withum

WITHUMSMITH+BROWN EMPLOYEE BENEFIT PLAN SERVICES GROUP Helping Retirement Plans “BE IN A POSITION OF STRENGTH”. C P , n w o r B THE BENEFITS OF CASH + h t i m S m BALANCE PLANS u h t i W by Joe Klinke, CPA, Senior Manager, WS+B Employee Benefit Plan Services Group, Princeton 1 1 0 2 © A cash balance plan is a special type defined benefit plans that guarantees participants earnings at a specified rate. This type of plan can offer an attractive alternative to a traditional defined benefit plan. The following offers a brief overview of some of the benefits of cash balance plans: Cash Balance Plan - Participant Perspective A cash balance plan is one

in which participants earn a monetary benefit for each year of service. The benefit is banked and at the end of each succeeding year, interest, at the rate stipulated in the plan, is added. The whole process being similar to a savings ac count, for which a deposit is made on an established annual date. Participants benefit, since they incur no investment risk. Younger participants frequently find this type of plan attractive because the benefit is generally portable and unlike a trad itional pension plan the benefit's value at any point in time is readily determinable. Cash Balance Plan - Sponsor Perspective Cash balance plans can be more attractive to sponsors with an ageing work force because the annual benefits don't escalate as employees approach retirement age, as they would in a traditional pension plan. However, if this is a transition plan there m ay be a need to have a transition feature that protects older workers, in order for the plan not to be deemed discriminatory. W ell thought out cash balance plans can be significantly more cost effective than traditional pension plans. Plan administrators, interested in cash balance plans are advised to speak to their retirement plan consultant to gain a more complete understanding of the costs and benefits of cash balance defined benefit plans. NEED MORE INFORMATION? If you need more information regarding this or any other topic affecting your retirement plan, visit our Withum ERISA Knowledge Corner online, follow us on Twitter at WSB_ERISA or contact us at ERISAhelp@withum.com to arrange a free consultation today. The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances....

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Cash Balance Plans Frequently Asked Questions

Cash Balance Plans Frequently Asked Questions By Robert Mand, Esq. Introduction This piece is intended to provide owners of small to medium size businesses with answers to frequently asked questions about cash balance plans. Focus The focus of the questions and answers is “owner-centric” retirement plans, those plans that provide the major part of the contributions to business owners, their family members and favored employees, while providing lower contribution amounts to all other employees. Frequently Asked Questions Question 1 : What is a cash balance plan? Answer 1 : A cash balance plan is a type of qualified retirement plan that guarantees participants a retirement benefit. ______________________________________________________________________________________________________ Question 2 : Who makes the contributions to a cash balance plan? Answer

2 : The company that establishes the plan makes the contributions to the cash balance plan, not the plan participants. Question 3 : How is the contribution amount determined? Answer 3 : The contribution formula is determined by an actuary when the plan is established, so that the contributions being made to the different categories of participants meet the objectives of the owners. The contributions must meet the requirements of IRS regulations, so that the plan is not considered to be discriminatory in favor of owners, family members and highly compensated employees. Thus, at the outset, the owners must determine how much the company is to contribute for each category of employees. Most often, company owners and family members are in the favored group, and receive larger contributions than all other employees, who receive lower contributions. Question 4 : Are the annual contribution amounts predictable, so that a company budget for the contribution? Answer 4 : When the plan is designed, the company establishes an annual interest rate to be credited to the account balance of each plan participant. Since the interest rate is guaranteed, the company’s contribution is adjusted to account for differences between the guaranteed interest rate and the interest rate actually earned by the plan’s investments. So as long as the earnings rate is close to the guaranteed rate established in the plan, then the annual contributions will fall within a reasonable range of the predicted contribution amount set by the plan contribution formula. ______________________________________________________________________________________________________ Question 5 : Are the annual contributions mandatory? Answer 5 : Yes, annual contributions to a cash balance plan are mandatory. Question 6 : What are the annual contribution limits for each participant? Answer 6 : The law does not set a contribution limit for each participant, as is the case in a 401(k) plan. Rather, the sum of the annual contributions and guaranteed interest rate for each participant at their retirement date may not exceed the lump sum that is the actuarial equivalent of the maximum annual retirement benefit. For 2011, the maximum annual retirement benefit for a plan participant is $195,000 per year. This equates to a lump sum of approximately $1,850,000. This results in larger contributions being permitted for employees who are closer to retirement, since there is less time to accumulate the required lump sum. Question 7: How do company contributions to a cash balance plan differ from...

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Cash Balance Plan Benefits for clients - Pinnacle Plan Design, LLC

Cash Balance Plan Information and Benefits Many owners desire larger tax deductions and accelerated retirement savings. Implementing a cash balance plan may be the best solution for such owners. Recent legislation encourages more and more professionals and successful business owners to adopt this type of plan. In a cash balance plan, a “theoretical” account balance (or “TAB”) is maintained on behalf of each participant. Thus, each participant in the cash balance plan has a TAB that resembles those in a 401(k) or profit sharing plan (defined contribution “DC” plans). On an annual basis the TAB is credited with a “compensation credit” and an “interest credit.” The compensation credit can be a flat dollar amount or a percentage of pay and

can vary by employee. The interest credit is determined by the plan document, and will typically be a fixed 5% rate or, alternatively, could be based on a conservative index, such as the rate on 30-year U.S. Treasury Securities. Because the cash balance plan is communicated in terms of an “account balance”, the benefits provided are more easily understood, and appreciated by employees. Cash balance plans take the mystery out of the employee benefit plan. Finally, cash balance plans are more predictable than traditional defined benefit plans; a participant’s account balance can be projected based on plan provisions to a future date with relative ease, no more special calculations or vague explanations. Examples of companies that benefited from implementing a cash balance plan: Bell, Inc., a small professional firm had a 401(k) profit sharing plan. Tim, the owner, was able to maximize his benefit at $49,000 with a cost for his six employees of $14,500. Celebrating th his 50 birthday in 2010, Tim is looking forward to retirement but understands that he will need to put away more than $49,000 per year to have the retirement of his dreams. We implemented a cash balance plan in 2010. The design enables Tim to contribute $154,500 toward his own retirement with a cost for his employees of $26,500. So, while his employee costs almost doubled, Tim’s contributions more than tripled. Dr. Tony has just brought a new, younger partner, Dr. Greg, on board. The discussions regarding the addition of a Cash Balance plan were difficult at first because Dr. Greg is not ready to seriously save for retirement. (He is worried about paying back medical school loans.) We designed the plan so that Dr. Tony gets $180,000 in the cash balance plan while Dr. Greg’s contribution is only $60,000 (a number in his comfort range). Their DC contributions are maximized and the cost for their 14 employees is 10.5% of compensation. Eighty-eight percent (88%) of the contributions to the plan are for the benefit of Dr. Tony and Dr. Greg. Cash balance plans are not just for small companies. One medical association has 74 physicians and over 400 employees. The plan design calls for various levels of cash balance contributions to the doctors and a de minimis contribution for the employees. Combined contributions to the defined contribution plan and the cash balance plan are over $9 million with 80% “allocated” to the...

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The Standardised Approach to Credit Risk

Superseded document Basel Committee on Banking Supervision Consultative Document The Standardised Approach to Credit Risk Supporting Document to the New Basel Capital Accord Issued for comment by 31 May 2001 January 2001 Superseded document Superseded document Table of Contents INTRODUCTION: OBJECTIVES OF THE STANDARDISED APPROACH .............................................. 1 A. THE RISK WEIGHTS IN THE STANDARDISED APPROACH ........................................................ 1 1. INDIVIDUAL CLAIMS .............................................................................................................................. 2 (i) Sovereign risk weights ...................................................................................................................... 2 (ii) Risk weights for Non-Central Government Public Sector Entities (PSEs) ....................................... 4 (iii) Risk weights for multilateral development banks (MDBs) ................................................................ 5 (iv) Risk weights for banks ...................................................................................................................... 6 (v) Risk weights for securities firms ....................................................................................................... 7 (vi) Risk weights for corporates............................................................................................................... 7 (vii) Risk weights of retail assets .............................................................................................................. 8 (viii)

Risk weights of claims secured by residential property .................................................................... 8 (ix) Risk weights of claims secured on commercial real estate ............................................................... 9 (x) Higher risk categories....................................................................................................................... 9 (xi) Other assets....................................................................................................................................... 9 (xii) Off-balance sheet items ..................................................................................................................... 9 (xiii) Maturity .......................................................................................................................................... 10 2. EXTERNAL CREDIT ASSESSMENTS................................................................................................... 11 (i) The recognition process .................................................................................................................. 11 (ii) Eligibility criteria............................................................................................................................ 11 3. IMPLEMENTATION CONSIDERATIONS............................................................................................. 12 (i) The mapping process ...................................................................................................................... 12 (ii) Multiple assessments....................................................................................................................... 13 (iii) Issuer versus issue assessment ........................................................................................................ 13 (iv) Short term/long term assessments ................................................................................................... 14 (v) Level of application of the assessment ............................................................................................ 14 (vi) Unsolicited ratings.......................................................................................................................... 14 B. CREDIT RISK MITIGATION IN THE STANDARDISED APPROACH ........................................ 14 1. INTRODUCTION...................................................................................................................................... 14 2. COLLATERAL.......................................................................................................................................... 16 (i) Minimum conditions........................................................................................................................ 17 (ii) The methodologies .......................................................................................................................... 19 (iii) Eligible collateral ........................................................................................................................... 19 (iv) The comprehensive approach ......................................................................................................... 20 (v) The simple approach....................................................................................................................... 28 3. NETTING .................................................................................................................................................. 30 (i) On-balance sheet netting ................................................................................................................ 30 (ii) Off-balance sheet netting/PFEs ...................................................................................................... 31 4. GUARANTEES AND CREDIT DERIVATIVES ..................................................................................... 31 (i) Introduction .................................................................................................................................... 31 (ii) Minimum conditions........................................................................................................................ 32 (iii) Operational requirements for guarantees....................................................................................... 33 (iv) Operational requirements for credit derivatives............................................................................. 33 (v) Range of eligible guarantors/protection providers ......................................................................... 35 (vi) Risk weights .................................................................................................................................... 35 (vii) Sovereign guarantees...................................................................................................................... 37 (viii) The level of w .................................................................................................................................. 37 5. MATURITY MISMATCHES.................................................................................................................... 38 (i) Definition of maturity...................................................................................................................... 38 (ii) Risk weights for maturity mismatches ............................................................................................. 38 Superseded document 6. CURRENCY MISMATCHES ................................................................................................................... 39 (i) Collateral ........................................................................................................................................ 39 (ii) On-balance sheet netting ................................................................................................................ 39 (iii) Guarantees/credit derivatives ......................................................................................................... 40 7. DISCLOSURE REQUIREMENTS ........................................................................................................... 40 (i) Collateral/on-balance sheet netting ................................................................................................ 40 (ii) Guarantees/credit derivatives ......................................................................................................... 40 Superseded document The Standardised Approach to Credit Risk INTRODUCTION: OBJECTIVES OF THE STANDARDISED APPROACH 1. This paper, which forms part of the second consultative package on the new capital adequacy framework produced by the Basel Committee on Banking Supervision (the Committee), describes the standardised approach to credit risk in the banking book. 2. The New Basel Capital Accord will continue to be applied to internationally-active banks in the G10 countries. Nevertheless, the Committee expects that its underlying principles should be suitable for application to banks of widely varying levels of complexity and sophistication. 3. In revising the Capital Accord, the Committee realises that a balance between simplicity and accuracy needs to be struck. In recognition that the optimal balance may differ markedly across banks, the Committee is proposing a range of approaches to credit risk, as it has for...

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Defined Benefit and Cash Balance Plans - United Retirement Plan

Maximizing Client Value Through Plan Design: Defined Benefit and Cash Balance Plans JoiningYou Today Lance Kesterson Vice-President, National Sales and Marketing Martin Smith, FCA, EA, MSPA President & Actuary National Associates, Inc a United Retirement Company 2012 Webinar Series Copyright 2012 United Retirement Plan Consultants 2 Accidental, or on purpose ? 2012 Webinar Series Copyright 2012 United Retirement Plan Consultants 3 Maximizing Client Value Through Plan Design: Defined Benefit and Cash Balance Plans One Company. One Mission. One Focus. Non-Producing Consulting TPA About United Retirement 2012 Webinar Series Copyright 2012 United Retirement Plan Consultants 4 “Everyone ends up somewhere… 2012 Webinar Series Copyright 2012 United Retirement Plan Consultants … and very few get there on purpose” 5 Today’s on purpose

Agenda • Quick level-set on DC and DB Plans • Deeper dive into Defined Benefit Plans • Cash Balance Defined Benefit Plans • Guided Illustrations • Specific Opportunities • Next Steps 2012 Webinar Series Copyright 2012 United Retirement Plan Consultants 6 General Benefits of Qualified Plans • Creditor Protection • Tax Deductible Contributions • Tax Sheltered Earnings – Trust Doesn’t Pay Income Taxes – New January 1st – 3.8% Tax on Investment Income for AGI above $250,000 (Healthcare Reform) 2012 Webinar Series Copyright 2012 United Retirement Plan Consultants 7 Basic Feature Comparison • 401(k), Profit Sharing, etc. • Individual accounts • Benefit not known • Benefits not guaranteed • Account balance determines benefit • Contributions are known and specifically limited – $50,000/$55,500 for 2012 • Discretionary company contributions • Participant assumes risk 2012 Webinar Series Copyright 2012 United Retirement Plan Consultants Defined Contribution Plans Defined Benefit Plans • Traditional, Cash Balance • Individual accrued benefits • Benefits are known • Benefits Covered by PBGC * • Plan document determines benefit • Benefits are known and contributions are determined – Can be > $250,000 • Mandatory company contributions • Employer assumes risk * - Owner Only plans and professional firms with <25 employees not covered. 8 41 62 $1 7 , 0 0 0 $5 0 , 0 0 0 $2 0 0 , 0 0 0 $8 0 , 0 0 0 46 62 $1 7 , 0 0 0 $5 0 , 0 0 0 $2 0 0 , 0 0 0 $1 0 5 , 0 0 0 47 62 $1 7 , 0 0 0 $5 0 , 0 0 0 $2 0 0 , 0 0 0 $1 1 0 , 0 0 0 48 62 $1 7 , 0 0 0 $5 0 , 0 0 0 $2 0 0 , 0 0 0 $1 1 5 , 0 0 0 49 62 $1 7 , 0 0 0 $5 0 , 0 0 0 $2 0 0 , 0 0 0 $1 2 5 , 0 0 0 50 62 $2 2 , 5 0 0 $5 5 , 5 0 0 $2 0 0 , 0 0 0 $1 3 0 , 0 0 0 51 62 $2 2 , 5 0 0 $5 5 , 5 0 0 $2 0 0 , 0 0 0 $1 3 5 , 0 0 0...

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Cash Balance – Profitable business – RAI - Retirement

The Cash Balance Retirement Plan Solution: Accelerate Savings and Greatly Reduce Taxes Many professionals find themselves with a retirement plan dilemma. Financial experts predict you will need 80% of your current income to maintain your standard of living upon retirement. Without a properly designed retirement plan in place, owners and employees alike may not be able to maintain their lifestyle at retirement. If you find yourself in this situation, and would also like a huge tax deduction, adding a Cash Balance Plan may be the solution. However, a Cash Balance Plan must be st established by December 31 to take advantage of tax deduction in 2013, although the plan doesn’t need to be funded until the tax return is due.

Cash Balance Plans provide participants an annual contribution limit sometimes over $250,000 (based on age). Compared to the limit for a 401(k)/Profit Sharing plan of $51,000 ($56,500 if age 50 or older). The contributions are tax deductible and it is possible to accumulate a retirement benefit of up to $2.5 million in 10 years! Furthermore, the nature of Cash Balance plans insulates them from market volatility and risk. The investment goal for a Cash Balance Plan is to protect the tax deduction rather than maximize returns. In a Cash Balance Plan, each participant has a hypothetical account which is credited with annual pay credits (the contribution) and interest credits (typically five percent). The participant does not have any investment risk. When paired with a 401(k)/profit sharing plan, the two are combined for nondiscrimination testing. The Cash Balance combination arrangement allows maximization of benefits to owners and other “key” participants while keeping employee contribution costs relatively low; around 6.5 percent to 10.5 percent of compensation. Cash Balance Plans are in the “defined benefit” family but are a HYBRID. Each year, an enrolled actuary must provide the funding requirement range to the plan sponsor. Employers can designate different contribution amounts for various participants which allows for greater flexibility. Once participants retire or terminate employment, they are eligible to receive the vested portion of their account balance. Cash Balance accounts are portable and can be rolled over to an IRA where no taxes are due until age 701/2. Cash Balance Plans are best for businesses that: Have professionals with income exceeding $150,000. Have professionals who have a contribution goal of $50,000 or more. Have stable income and 25 or fewer employees. Have highly compensated employees who are older than the non‐highly compensated employees. If you are concerned about the amount of taxes you’ll have to pay on this year’s income, or if you are concerned that you are late to the game in saving for retirement, consider the addition of a Cash Balance Plan to your company. The combination of your existing or start‐up 401(k)/profit sharing plan with a Cash Balance Plan can provide a tremendous opportunity to reduce taxable income and significantly increase your retirement nest egg. Retirement Administration, Inc. 650‐961‐5500 phone www.retirementadmin.com...

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PG&E Cash Balance - IBEW Local 1245

INFORMATION ON PG&E’s PROPOSED OFFER OF A CASH BALANCE PENSION PLAN FOR NEW HIRES AFTER 2013 Background on Cash Balance Pension Plans COMPANIES WHO HAVE CONVERTED TO CASH BALANCE PLANS 1998: San Diego Gas and Electric 1999: Southern California Edison 2010: NV Energy DRIVING FACTORS: Pension regulations Volatility in stock market Regulatory/public pressure Cash Balance Plan Design Annual contribution of negotiated percentage of wage + Negotiated interest + Increased 401(k) = Fixed amount at retirement with choice of: Lump sum pay out Convert to a lifetime annuity 1 PG&E Plan Design for New Hires After 2013 5-9% of Straight Time Pay (See Plan Formulas below) + 30-year Treasury bond rate interest +

401(k) 75% up to 8% Automatic enrollment with opt-out = Lump sum or convert to a lifetime annuity Comparisons with Local Utilities Cash 401(k) Total Balance San 7.5% 50% to 10.5% Diego 6% Edison 3% 100% to 9% 9% 6% 15% NVE 4% 100% to 10% 6% PG&E 5% 75% to 11% Proposed 9% 8% 15% Comparison with Existing Pension Includes all components of retirement income: pension, 401(k), and social security Before age 52: cash balance account provides higher income replacement Position Age Comparison Electric Crew Foreman 55 81% 62 93% 65 97% Customer Service Rep 55 81% 62 91% 65 96% 2 Pension • Monthly paid pension based on • Cash balance account of accumulated Plan pay and service at retirement annual pay credits plus interest Formula • 1.5% final pay X service up to Annual Pay Credits based on Age and Service: 25 years, plus • Less than 40 points 5.00% • 1.6% final pay x 25+ years of • 40-49 points 6.00% service • 50-59 points 7.00% • 60-69 points 8.00% • 70 or more points 9.00% Annual interest based on 30-Year Treasury rates • 5-year vesting • 3-year vesting • Not portable if you leave PG&E • Portable—you can take your benefit with you before retirement; pension if you leave PG&E before retirement payments can begin at age 55 or later • Early retirement benefit • Full account balance payable when you retire reductions may apply or leave PG&E—regardless of age • Monthly annuity for life • Choice of monthly annuity for life or lump- sum distribution 401(k) • $0.60 per $1 up to 3% of pay • $0.75 per $1 up to 8% of pay after Match for completing 1-3 years of service 1 year of service • $0.60 per $1 up to 6% of pay for 3+ years of service Issues for Consideration Value to employee of lump sum option Regulatory pressure on pension costs RSP is a greater component, so greater risk is transferred to employee Two-tier / two platforms No changes to current program of pension and 401(k) Retirement Savings Plan (RSP) for current employees New retirement program for new employees hired January 1, 2013, or later Higher 401(k) company matching contribution Automatic enrollment in 401(k) at the full company match level Current employees can opt in to the new program, effective 2014...

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Interagency Supervisory Guidance on Counterparty Credit Risk

1 Office of the Comptroller of the Currency Federal Deposit Insurance Corporation Board of Governors of the Federal Reserve System Office of Thrift Supervision Interagency Supervisory Guidance on Counterparty Credit Risk Management June 29, 2011 Table of Contents I. Introduction ...........................................................................................................................................2 II. Governance 1. Board and Senior Management Responsibilities ........................................................................................... 3 2. Management Reporting ................................................................................................................................. 3 3. Risk Management Function and Independent Audit ..................................................................................... 4 III. Risk Measurement 1. Counterparty Credit Risk Metrics ................................................................................................................. 4 2. Aggregation of Exposures ............................................................................................................................. 5 3. Concentrations ............................................................................................................................................... 6 4. Stress Testing ................................................................................................................................................ 7 5. Credit Valuation Adjustments ....................................................................................................................... 8 6. Wrong-Way Risk ......................................................................................................................................... 10 IV. Systems Infrastructure Considerations ..........................................................................................11 V. Risk Management 1. Counterparty Limits .................................................................................................................................... 13 2. Margin Policies and Practices .....................................................................................................................

14 3. Validation of Models and Systems .............................................................................................................. 15 4. Close-out Policies and Practices .................................................................................................................. 16 VI. Managing Central Counterparty Exposures ................................................................................................ 16 VII. Legal and Operational Risk Management .................................................................................................... 17 1. Legal Risk Arising from Counterparty Appropriateness ............................................................................. 18 VIII. Conclusion ..................................................................................................................................................... 19 Appendices A: Glossary ....................................................................................................................................................... 20 B: Detail on Model Validation and Systems Evaluation ................................................................................. 23 2 COUNTERPARTY CREDIT RISK MANAGEMENT I. Introduction This guidance discusses critical aspects of effective management of counterparty credit risk (CCR), and sets forth sound practices and supervisory expectations for an effective CCR management framework. CCR is the risk that the counterparty to a transaction could default or deteriorate in creditworthiness before the final settlement of a transaction’s cash flows. Unlike the credit risk for a loan, when only the lending banking organization 1 faces the risk of loss, CCR creates a bilateral risk of loss because the market value of a transaction can be positive or negative to either counterparty. The future market value of the exposure and the counterparty’s credit quality are uncertain and may vary over time as underlying market factors change. The guidance is intended for use by banking organizations, especially those with large derivatives portfolios, in setting their risk management practices, as well as by supervisors as they assess and examine such institutions’ management of CCR. For other banking organizations without large derivatives portfolios, risk managers and supervisors should apply this guidance as appropriate, given the size, nature, and complexity of the CCR risk profile of the banking organization. CCR is a multidimensional form of risk, affected by both the exposure to a counterparty and the credit quality of the counterparty, both of which are sensitive to market-induced changes. It is also affected by the interaction of these risks, for example the correlation 2 between an exposure and the credit spread of the counterparty, or the correlation of exposures among the banking organization’s counterparties. Constructing an effective CCR management framework requires a combination of risk management techniques from the credit, market, and operational risk disciplines. CCR management techniques have evolved rapidly over the last decade, along with increased complexity of derivative instruments under management. Banking organizations substantially improved their risk management practices during this time; however, in some cases, implementation of sound practices has been uneven across business lines and counterparty types. Further, the financial crisis of 2007-2009 revealed weaknesses in CCR management at many banking organizations,...

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Cash Balance Plans - Daniel Biss

STATE REPRESENTATIVE DANIEL BISS HOUSE BILL 6149 AND CASH BALANCE PLANS FREQUENTLY ASKED QUESTIONS 1. What is a defined benefit plan? A pension plan in which the benefits are based on a formula. For instance, the employee might receive 2% of their final salary for each year served, so that after 35 years of employment their pension would be 70% of their final salary. Therefore, the employee can depend on a minimum benefit, but the employer carries all the risk and controlling cost-growth is difficult. 2. What is a defined contribution plan? A 401(k)-style pension plan in which benefits are paid entirely out of an investment account the employee controls. For instance, the employee and the employer might each pay

6% of each paycheck into the account, and the employee would be responsible for investing it. Therefore, the employee carries all the risk and if the employee is not receiving Social Security benefits, has no guarantee of any minimum benefit. However, these plans have much more predictable costs for the employer. 3. Is HB6149 a benefit cut from Tier II? No. The benefit is actuarially more generous for many employees. However, the plan is also better for the state because it’s predictable and easily manageable, avoids abuses, and complies with federal law. Plus, it will always remain affordable, even as life spans and retirement ages change. 4. Is this constitutional? Yes. It only affects future employees. 5. If this is so great, why doesn’t anyone else do it? They do! Nebraska and Sweden, among many others, utilize cash balance plans. 6. Would HB6149 require the state to begin participating in Social Security? No. Because cash balance plans provide a minimum benefit to employees, it is both legal and fair to offer this in lieu of Social Security. This helps keep HB6149 affordable for the state, since it avoids the requirement of making expensive employer payments into the Social Security system. 7. What happens if the pension fund collects interest below 5% or above 10%? The employees’ accounts will never collect interest outside of the 5% - 10% range, even when the actual fund does. The 5% floor is necessary to guarantee the minimum benefit and the 10% ceiling is necessary to counterbalance the floor and keep the system stable and affordable for the state. 8. Will monthly checks stop if the account reaches zero? No. The annuitant will continue to receive monthly checks as long as they live. The account balance is used to calculate the size of the benefit based upon actuarial averages, so that the additional cost of paying benefits to individuals who outlive expectations is balanced against the reduced cost associated with individuals who do not live as long as expected. Thus, no retiree is penalized for longevity. 9. What if an employee retires and then goes back to work? If a person returns to full-time work after initiating their pension, the annuity ceases and employees and employers resume payment into the system. The notional account continues to grow until the employee retires again, at which point the annuity is recalculated. STATE REPRESENTATIVE DANIEL BISS * 847-568-1250...

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Cash Balance Symposium Monograph, Chapter 2

1 II The Emergence of Hybrid Pensions and Their Implications for Retirement Income Security in the 21st Century by Robert L. Clark and Sylvester J. Schieber 1. Introduction The conversion of large-company pension plans from traditional defined benefit (DB) plans to hybrid plans has been the focus of considerable debate during the past two years. During this time, we have examined various aspects of the hybrid pension phenomenon in a series of papers (Brown et al. 2000; Clark and Munzenmaier 2001; Clark and Schieber 2000; Clark, Haley, and Schieber 2001; and Clark and Schieber 2002a,b). Our purpose has been to investigate the reasons firms convert their pension plans, illustrate the impact of plan changes on expected pension benefits, and identify

the winners and losers when pensions are converted from traditional DB plans. In addition, we have analyzed some of the more controversial issues raised in the shift to hybrid plans, particularly those involving workers who face modified benefits under their new plans and the lack of further benefit accruals, known as the wear-away problem. In this paper, we summarize the results from our earlier papers and analyze the potential impact of plan conversions on retirement income security in the 21st century. The second section provides a brief discussion of the history and reasons for the shift to hybrid plans and the third section examines the underlying reasons for plan conversions. The fourth section evaluates the short- and long-term impact of the shift to hybrid plans on workers, and the fifth discusses the importance of communications in the transition. The sixth section assesses the need for further legislation to regulate the shift to hybrid pensions 2 while the final section discusses the future of retirement income security within the context of the hybrid pension controversy. 2. Background Hybrid pension plans are known by a variety of names, including cash balance plans, cash value plans, and pension equity plans; however, most can be sorted into two general types. The first type of plan, referred to here as a cash balance plan, defines a worker's "notional account" based on an annual contribution rate for each year of work plus an accumulating interest on the sum of annual contributions. The second type of hybrid pension, referred to here as a pension equity plan (PEP), defines the benefit as a percentage of final average earnings for each year of service under the plan. Both types of plans specify and communicate the benefit in lump-sum terms payable at termination, rather than as an annuity payable at retirement, which is typical for DB plans. 1 The first hybrid pension, a cash balance plan, was created by BankAmerica in 1985. Initially only a few companies copied this new form of pension. During the latter half of the 1990s, the pace of conversion to hybrid plans began to accelerate. By May 1999, a survey by Pensions and Investments reported that at least 325 plan sponsors had adopted a hybrid plan (Williamson, 1999). Extending this list by tracking reports of plan conversions in the media and annual reports, we estimate that around 500 firms have established hybrid pension plans to...

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Cash Balance Plan - Local 702

Retirement Plan – Union CB Supp. P-1 April 2013 A Plan Designed to Provide Security for Employees of Ameren Retirement Plan – Union Cash Balance Supplement Benefits for Certain Contract Employees Amended and Restated January 1, 2012 The following is a Summary Plan Description for the Ameren Retirement Plan – Union Cash Balance Supplement - Benefits for Certain Contract Employees, otherwise known as the "Union Cash Balance Plan." This Summary Plan Description (SPD) describes benefits applicable to contract employees of AmerenEnergy Resources Generating Company – IBEW Local 51, AmerenEnergy Generating Company – IBEW Local 702 and 702 Clerical, AmerenEnergy Generating Company – IUOE Local 148 and 148 Clerical, Ameren Missouri Company, Callaway Energy Center, Unit 1 – UGSOA Local 11

and employees newly-hired on or after October 15, 2012 into one of the following contract groups: AIC (formerly AmerenIP) IBEW Local 51, IBEW Local 51-(formerly 1306), IBEW Local 309, IBEW Local 702, Laborers Local 12 Counties, Pipefitters Local 101, Pipefitters Local 360, Laborers Local 459, IBEW Local 51 MDF- (formerly 1306MDF), Laborers Local 100, IBEW Local 51 MDF; AIC (formerly AmerenCILCO) IBEW Local 51; or AIC (formerly AmerenCIPS) IBEW Local 702-Illini, IBEW Local 702-Great River, IBEW Local 702-Shawnee, IBEW Local 309 and IBEW Local 649]. Although every effort has been made to provide accurate information in this SPD, the possibility of error always exists. The estimates of benefit values in this summary do not represent a guarantee of the benefits reported. P-2 Retirement Plan – Union CB Supp. April 2013 AMEREN RETIREMENT PLAN TABLE OF CONTENTS INTRODUCTION.......................................................................................................4 DEFINITIONS..........................................................................................................4 ELIGIBILITY............................................................................................................5 VESTING..................................................................................................................6 HOW YOUR ACCOUNT GROWS................................................................................6 INTEREST CREDITS ...............................................................................................................7 REGULAR CREDITS ................................................................................................................8 TRANSITION CREDITS ............................................................................................................8 ENHANCEMENT CREDIT (UGSOA – LOCAL 11 ONLY).......................................................................9 SPECIAL CONVERSION CREDIT ..................................................................................................9 HOW YOUR OPENING ACCOUNT BALANCE WAS DETERMINED........................................................... 11 PROTECTING YOUR PREVIOUS PLAN BENEFIT .............................................................................. 11 SOCIAL SECURITY TEMPORARY SUPPLEMENT (AEG LOCAL 148 AND 148 CLERICAL ONLY) ........................ 11 BENEFITS IF YOU RETIRE.....................................................................................12 PAYMENT METHODS..............................................................................................12 CALCULATING YOUR BENEFIT UNDER DIFFERENT METHODS OF PAYMENT ............................................ 13 CONVERTING YOUR CASH BALANCE TO A MONTHLY SINGLE LIFE ANNUITY....13 CONVERTING YOUR CASH BALANCE TO A MONTHLY JOINT & SURVIVOR ANNUITY................................................................................................................14 SOCIAL SECURITY BENEFITS................................................................................14 TAXES ON PLAN PAYMENTS..................................................................................14 ROLLOVERS...........................................................................................................15 BENEFITS IF YOU LEAVE AMEREN BEFORE RETIREMENT...................................15 IF YOU LEAVE BEFORE BECOMING VESTED AND ARE RE-EMPLOYED BEFORE RETIREMENT ......................... 15 IF YOU ARE RE-EMPLOYED AFTER RECEIVING YOUR FIRST MONTHLY ANNUITY PAYMENT ......................... 16 IF YOU ARE RE-EMPLOYED AFTER RECEIVING A LUMP SUM PAYMENT ................................................. 16 BENEFITS IF YOU ARE DISABLED.........................................................................16 BENEFITS IF YOU DIE BEFORE RETIREMENT.......................................................16 CALCULATING THE SURVIVOR BENEFIT FOR A SPOUSE BENEFICIARY ................................................... 16 CALCULATING THE SURVIVOR BENEFIT FOR A NON-SPOUSE BENEFICIARY ............................................ 17 FILING CLAIMS FOR BENEFITS............................................................................17 CLAIMS PROCEDURES........................................................................................................... 17 CLAIMS REVIEW ................................................................................................................. 18 ADDITIONAL INFORMATION................................................................................19 ASSIGNMENT OF BENEFITS .................................................................................................... 19 QUALIFIED DOMESTIC RELATIONS ORDER (QDRO)...................................................................... 19 BENEFIT LIMITATIONS.......................................................................................................... 20 WHEN BENEFITS ARE NOT PAID OR REDUCED ............................................................................. 20 PLAN TERMINATION ............................................................................................................ 20 TOP HEAVY PROVISIONS....................................................................................................... 20 EMPLOYMENT RIGHTS .......................................................................................................... 20 IRS APPROVAL .................................................................................................................. 21 THE PENSION BENEFIT GUARANTY CORPORATION (PBGC) ............................................................. 21 GENERAL PLAN INFORMATION............................................................................21 ERISA INFORMATION...........................................................................................22 YOUR RIGHTS UNDER ERISA................................................................................................. 22 THE PENSION BENEFIT GUARANTY CORPORATION (PBGC)...............................23 Retirement Plan – Union CB Supp. P-3 April 2013 APPENDIX A...........................................................................................................25...

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Credit Risk - Monetary Authority of Singapore

2 Fundamentals 1 3 Risk Management Policies and Procedures 2 3.1 Risk Management Strategy 2 3.2 Risk Management Structure 2 3.3 Credit Policies 3 3.4 Procedures 4 3.5 Delegation of Authority 4 3.6 Credit Criteria 5 3.7 Credit Limit 6 3.8 Credit Extension to Related Parties 6 4 Risk Measurement, Monitoring and Control 7 4.1 Credit Granting 7 4.2 Risk Mitigation 8 4.3 Monitoring 9 4.4 Credit Review 11 4.5 Classification and Provision 11 4.6 Problem Credits 12 4.7 Credit Administration 13 4.8 Internal Risk Rating 14 4.9 Credit Portfolio Risk Management 16 4.10 Stress Testing 18 5 Credit Risk in the Trading Book 19 Checklist of Sound Practices to Adopt I GUIDELINES ON RISK MANAGEMENT PRACTICES MARCH 2013 - CREDIT RISK MONETARY AUTHORITY OF SINGAPORE 1 1

INTRODUCTION The chapter provides guidance on sound practices in credit risk management. It also articulates broad principles that should be embedded in a risk management framework covering strategy, organisational structure, policy, as well as credit control processes for origination, monitoring and administration of credit transactions and portfolios. The guidelines are applicable to the extension of credit by financial institutions. In the case of banks, they are applicable to both the banking and trading books. 2 FUNDAMENTALS 2.1 Credit risk1 is the risk arising from the uncertainty of an obligor’s2 ability to perform its contractual obligations. Credit risk could stem from both on- and off-balance sheet transactions. An institution is also exposed to credit risk from diverse financial instruments such as trade finance products and acceptances, foreign exchange, financial futures, swaps, bonds, options, commitments and guarantees. 2.2 Credit risk often does not occur in isolation. A risk event may engender both market and credit risks. For example, a rise in interest rates can impair the creditworthiness of the bond issuer thereby increasing the credit risk to an institution holding those bonds. At the same time, the fall in the value of the bond raises the market risk for the institution. Similarly, if an institution holds a large number of an obligor’s shares as collateral for loans granted, a deterioration in the obligor’s credit standing can result in lower share prices, causing an increase in both market and credit risks. 2.3 An institution should therefore adopt a holistic approach to assessing credit risk and ensure that credit risk management is part of an integrated approach to the management of all financial risks. The institution...

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Cash Balance Plans 101 - Pension Dynamics Corporation

PENSION DYNAMICS C O R P O R A T I O N Benefit BENEFIT DYNAMICS www.PensionDynamics.com Insights “Manage your Benefits... Protect your Future” A non-technical review of qualified retirement plan legislative and administrative issues January 2011 they generate determine a participant’s ultimate retire- Cash Balance Plans 101 ment benefit. Cash balance plans have enjoyed a recent resurgence A defined benefit (DB) plan promises a benefit using in popularity. However, these plans, which can provide a formula that is usually based on compensation and tax-deductible benefits as much as five times greater years of service. For example, a DB plan might provide than 401(k) profit sharing plans, have actually existed an annual benefit equal to 1% of average compen- for

more than 30 years. When the Pension Protec- sation for each year of service. If a participant has tion Act of 2006 (PPA) resolved much of the legal average compensation of $65,000 over 10 years with uncertainty of these plans, small and large companies the company, the annual benefit is equal to $6,500 alike showed a renewed interest. According to a recent ($65,000 x 1% x 10 years of service) for the rest of the research report, the number of cash balance plans in- participant’s life. creased by more than 23% from 2006 to 2007 and more than 75% of existing cash balance plans are sponsored Rather than limiting contributions, the IRS limits the by companies with fewer than 50 employees. maximum annual benefit a DB plan can provide to a par- ticipant to $195,000 per year. The contribution is a func- What is a Cash Balance Plan? tion of how much is needed to fund the promised benefits. Before answering this question, some general back- While there are a number of variables, the following table ground information helps put the discussion in context. summarizes the tax-deductible contributions to fund A defined contribution (DC) plan, such as a 401(k) maximum benefits for DB participants of different ages: profit sharing plan, dictates the contributions that go AgeContribution into the plan each year. Contributions, which are usu- 35 $29,000 40 $40,800 ally discretionary, include employee salary deferrals, 45 $59,400 employer matching contributions and employer profit 50 $91,100 55 $153,900 sharing contributions. The maximum amount a par- 60 $195,500 ticipant can receive in a DC plan each year is $49,000 65 $245,600 for those under age 50 and $54,500 for those age 50 or The employer is said to bear the investment risk because older. These contributions and the investment returns the higher the return on investment, the lower the portion of the funding that must come from the com- plans can only use a “market rate of return.” Examples pany and vice versa. To the extent a DB plan is not fully of market rates include the 30-year Treasury rate; the funded, contributions are generally required each year. interest rate on long-term, investment-grade bonds; a stock market index such as the S&P 500; or the actual A cash balance plan is a type of plan that is sometimes rate of return of the plan’s investments. referred to as a hybrid plan, because...

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Cash Balance Plans: A New Approach for Pensions - Aarp

Cash Balance Plans: A New Approach for Pensions Each type of pension plan has its own rules. The rules make a difference in how fast you can save the money you need to reach your retirement goals. Cash balance plans are a new type of pension plan that has emerged in the last few years. They have different rules from both traditional pensions and 401(k)-type plans. Some employers have changed their traditional pension plan into a cash balance plan and others may do so in the future. To see if you have a cash balance plan and to make sure you know how it works, ask your company’s human resources department for the Summary Plan Description (SPD). There are two

basic types of retirement plans for employees. One is the traditional pension plan, also known as a defined benefit plan. In this case, the employer puts all the money into the pen- sion account and invests the money. (For more information, refer to AARP’s Money Matters Tip Sheet on Pensions.) The second type of pension plan is called defined contribution. The most com- mon example is a 401(k). With this type of plan, you decide how much to contribute and you get a tax deduction for the money you contribute. (For more information, refer to AARP’s Money Matters Tip Sheet on 401(k) plans.) How Cash Balance Plans Work The cash balance plan combines some features of a traditional pension, and some features of a 401(k)- type retirement account. Here are the key points: • Your employer deposits a “pay credit” and an “interest credit” into an account for you every year. For example, your pay credit may be 6 per- cent of your salary; the interest credit may be 5 percent of your account balance. • You generally don’t have to put any money into the account. The employer invests the money. • You cannot access to the money unless you are “vested,” meaning that the company cannot take away or reduce the benefit that you’ve earned. The company must vest you in three years. • When you leave your job, you are entitled to the sum of the money that’s been put away for you while you worked for that employer. • You can choose how to take the money—as a yearly payment for the rest of your life, or in a lump sum. If you take the lump sum, you may transfer it into a 401(k) at your new job, or into a Rollover IRA. Cash Balance Benefits A cash balance plan is considered a defined ben- efit plan and must follow general rules that the govern ment sets for these plans. But, there could be a big difference between the amount of money recieved from a traditional pension versus a cash bal- ance plan. • The formula in either plan typically gives you credit for each year you work. With a traditional pension, your benefit is based on your final average pay. The formula typically gives you more credit for working more years. Typically, your highest earnings are in the final years you work for your employer,...

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Analysis of Recent Cash Balance Plans in the Public

Analysis of Recent Cash Balance Plans in the Public Sector and the Importance of Arcane Actuarial Concepts Thomas B. Lowman, FSA, EA Bolton Partners, Inc. NCPERS 2013 Legislative Conference Monday, January 28, 2013 Washington, D.C. 1 Thomas B. Lowman, FSA, EA, MAAA • Thomas B. Lowman is the Chief Actuary at Bolton Partners, Inc. in Baltimore. Tom has over thirty-four years of pension actuarial experience. He is a Fellow of the Society of Actuaries (1982), an Enrolled Actuary (1981), a member of the American Academy of Actuaries (1982), and a Fellow of the Conference of Consulting Actuaries. Tom is also a member of the Conference of Consulting Actuaries Public Plans Steering Committee where he helped draft their response to GASB

and is currently working on the CCA pension funding guidelines. • Tom’s SOA Papers – Cash Balance (2000) – DROP(2003) – Gain Sharing (2012) Visit Tom’s Corner at www.BoltonPartners.com 2 Cash If you have employee Balance contributions in your plan, you probably Plans are have a cash balance notEvil feature. 3 It is not until they are ready “ to retire that they understand how little they are actually getting. ” Quoted by Ellen Schultz in an article in the Wall Street Journal 1999 4 Definition Section 414(j) defines the term “defined benefit plan” to be : Any plan which is not a defined contribution plan. 5 Cash Balance Concept • A DB plan that is more like a DC plan – Pays credits (employer + employee) – Interest crediting rate – Annuity conversion rate Leverage – the difference between Fund Investment Return and Interest Credit - not the same as arbitrage 6 Annuity Conversions / Mortality Improvements Source: SOA 7 Comparison to Traditional Final Average Pay Plan (like DB vs. DC) BENEFITS BENEFITS for younger employees SAME COST (NC) for older employees 8 Cash Balance History • Started in the 1990s in the private sector • In 1999, hit PR and regulatory bumps • Most of the issues dealt with “Conversions”/Use of Surplus/Elimination of Early Retirement Subsidies – Whip-saw litigation – Above market interest credit rates – Wear-away 9 History in the Public Sector • Texas Municipal Plan (late 1940s) – Pay credits: 5% - 7% from employees plus 100% to 200% match – 90+% get 21% – Interest Credit: 5% – UP84 5% Annuity Conversions – COLAs • Kansas –2015 new hires – Pay credits: 6% from employees plus 3% to 6% from employer depending on service – Interest Credit: 5.25% but possibly more depending on actual return and funding • Nebraska (2003), Louisiana (2013) 10 Conversion (DB to DC to CB) • Defined Contribution plans to Cash Balance Plans – Montgomery County MD’s GRIP 11 Kentucky –PEW recommendation • Proposed cash balance plan for all new employees – 9% pay credit (including 5% employee contribution) for general employees – 15.5% pay credit (8% employee contribution) for public safety – Interest Credit: 4% plus 75% of plan return over 4% Pew advocating change to Cash Balance design elsewhere 12 Kentucky Interest Credit 13 Embedded CB Design Features • Interest credits tied to equity indices • Minimum interest guarantees...

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NPERS Cash Balance Plan

Nebraska Public Employees Retirement Systems Cash Balance Plan Presented to KPERS Study Commission By Phyllis Chambers, Executive Director August 31, 2011 NPERS Overview circle5 NPERS administers six retirement plans with 112,000 members and $9 billion in assets. ◦ School –DB – established 1946 ◦ State Patrol –DB –1947 ◦ Judges –DB –1955 ◦ State –DC –1964 and CB –2003 ◦ County –DC –1965 and CB –2003 ◦ Deferred Compensation (DCP) –1976 2 2010 NPERS Funded Status circle5Schools –82% circle5Patrol –85% circle5Judges –100% State CB –94%circle5 circle5County CB –93% circle5DC plans –100% circle5 GASB 25 Funded ratio = AVA÷AAL 3 Cash Balance Plan circle5 Introduced mid-1980’s in corporate sector. circle5 DB Hybrid –IRS considers it a DB plan because of the

guaranteed credited rate. circle5 Individual account consists of EE and ER contributions, interest credits & dividends. circle5 Member account value never goes down. circle5 Pooled assets managed by professionals. circle5 Plan requires an annual actuarial valuation. circle5 Annuity is based on account value & age, not a formula. 4 Nebraska Benefit Adequacy Study circle5 2000 actuarial study circle5 Compared State and County with School DB plan circle5 S & C average annual salaries lower. ◦ School -$40,000, State -$35,000, County -$30,000 circle5 Average annual investment return, 5-year period ◦ 7% for DC plans & 11% School DB plan circle5 Retirement Income replacement was 5-8 % higher for DC plans to maintain same standard of living. ◦ 78% for Schools, 83% for State, 86% for County. 5 Goals of Cash Balance Plan circle5 Improve retirement benefits for State and County Employees -from DC to CB circle5 Retention -reward long-term employment. circle5 Offer self-funded annuity & COLA options ◦ over 90% were taking lump sum refunds circle5 Reduce DC investment & timing risk. ◦ 90% of employees in 3 funds, 50% in balance fund ◦ Market crisis can affect timing of retirement ◦ Reduces investment education for members. circle5 Reduce costs & fees. ◦ DC -$92/member & CB -$71/member 6 Nebraska CB Features circle5 Mandatory for new hires. DC members one-time option to transfer in 2003 –1/3 transferred, another 1/3 transferred again in 2007. circle5 NPERS Contribution rates: ◦ State –4.8 % EE, 156% ER –7.48% = 12.28% ◦ County –4.5% EE, 150% ER –6.75% = 11.25% circle5 Credited rate based on Federal mid-term rate+1.5 % with 5% minimum guarantee by the State. July 2011 MTR was 2.0%. circle5 Rate adjusted quarterly. Accounts credited daily. circle5 Annuity rate is 7.75% -determined by Board. 6 Nebraska CB Features (cont’) circle53-year vesting for employer portion. circle5Distributions options for termination, retirement ( age 55) or disability – Refund, rollover, annuity, or combination. Death –Beneficiaries receive refund or circle5 rollover; spouse may also receive annuity; if already receiving a benefit, determined by the annuity option. circle5Optional dividend granted by Board. 8 CB Dividends circle5 Board may grant dividend if actuarial contribution rate is at least 90% of the actual contribution rate per statute. circle5 Board added policy -funded ratio must be 100%. circle5 Dividend based on account value at previous calendar year end. circle5 Problem when employees terminate between December 31 and dividend payment -dividend posts...

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Strategies for Hedging Interest Rate Risk in a Cash Balance Plan

Russell Investments // Strategies for hedging interest rate risk in a cash balance plan By: Justin Harvey, ASA, Asset Allocation Strategist JULY 2012 Strategies for hedging interest rate risk in a cash balance plan Issue: Over the past decade, the trend among public-sector and corporate pension plan sponsors from traditional “pay x service” defined benefit plans to cash balance (hybrid) plans has increased.1 What kinds of interest rate hedging investment strategies should sponsors of cash balance plans consider as they seek to manage funded status? Response: A wide range of different cash balance plan designs exists, so a hedging tool that will work well for one plan may not work as well for another. The plan design elements that most

impact the effectiveness of various hedging strategies are: 1. The interest crediting method; 2. The amount of legacy/retiree liabilities; and 3. The minimum interest crediting rate. Depending on the plan design, some of the investment strategies available for hedging interest rate risk are: 1. Selling credit default swaps to gain exposure to high-quality corporate bond spreads; 2. Selling Treasury futures to reduce interest rate exposure; 3. Purchasing duration-matching high-quality corporate bonds; or 4. Using swaptions with strategically chosen expiration dates and strike prices. 1 Even as recently as earlier this year, Bobby Jindal, governor of Louisiana, proposed converting his state’s pension plan to a cash balance formula. Source: Kozlowski , Rob; “Louisiana governor pitches pension changes.” P&I Online, January 26, 2012. A wide range of different cash balance plan designs exists, so a hedging tool that will work well for one plan may not work as well for another. Russell Investments // Strategies for hedging interest rate risk in a cash balance plan / p 2 While these strategies may help sponsors hedge interest rate risk, closely tracking liability movements with a plan’s assets is more difficult in a cash balance plan than in a traditional defined benefit plan. Background When plan sponsors first started implementing cash balance plans, there was some concern that the plans’ designs discriminated against older workers, because the shorter periods until retirement did not allow much time for interest earnings to compound.2 This didn’t stop the adoption of cash balance plans as cheaper alternatives to traditional plans. By 2004, 34 of the Fortune 100 companies were sponsoring open hybrid plans.3 While some of these plans have recently been closed or frozen, as of 2010, 34.1% of Pension Benefit Guaranty Corporation (PBGC) insured pension plans with 5,000 or more participants were hybrid designs, the most common of which is a cash balance plan.4 A cash balance plan is treated as a defined benefit plan for funding and regulatory purposes, but is similar to a defined contribution (DC) plan in that a participant’s benefit is an account balance. However, unlike in a DC plan, the plan sponsor still assumes the investment risk, because the value of the cash balance account is usually not tied to the return actually earned on the plan’s assets. The participant’s hypothetical account balance is credited with a “pay credit” each year (in an open plan) and an “interest credit,” which is essentially...

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Credit risk measurement: Developments over the last 20 years

Credit risk measurement: Developments over the last 20 years Edward I. Altman, Anthony Saunders * Salomon Brothers Center, Leonard Stern School of Business, New York University, 44 West 4th street, New York, NY 10012, USA Abstractz This paper traces developments in the credit risk measurement literature over the last 20 years. The paper is essentially divided into two parts. In the first part the evolution of the literature on the credit-risk measurement of individual loans and portfolios of loans is traced by way of reference to articles appearing in relevant issues of the Journal of Banking and Finance and other publications. In the second part, a new approach built around a mortality risk framework to measuring the risk and returns

on loans and bonds is presented. This model is shown to oC128er some promise in analyzing the risk-re- turn structures of portfolios of credit-risk exposed debt instruments. 1998 Elsevier Science B.V. All rights reserved. JEL classification: G21; G28 Keywords: Banking; Credit risk; Default 1. Introduction Credit risk measurement has evolved dramatically over the last 20 years in response to a number of secular forces that have made its measurement more Journal of Banking & Finance 21 (1998) 1721–1742 * Corresponding author. Tel.: +1 212 998 0711; fax: +1 212 995 4220; e-mail: asaun- der@stern.nyu.edu. 0378-4266/97/$17.00 1997 Elsevier Science B.V. All rights reserved. PII S 0 3 7 8 - 4 2 6 6 ( 9 7 ) 0 0 0 3 6 - 8 important than ever before. Among these forces have been: (i) a worldwide structural increase in the number of bankruptcies, (ii) a trend towards disinter- mediation by the highest quality and largest borrowers, (iii) more competitive margins on loans, (iv) a declining value of real assets (and thus collateral) in many markets and (v) a dramatic growth of oC128-balance sheet instruments with inherent default risk exposure (see, e.g. McKinsey, 1993), including credit risk derivatives. In response to these forces academics and practitioners alike have responded by: (i) developing new and more sophisticated credit-scoring/early-warning sys- tems, (ii) moved away from only analyzing the credit risk of individual loans and securities towards developing measures of credit concentration risk (such as the measurement of portfolio risk of fixed income securities), where the as- sessment of credit risk plays a central role (iii) developing new models to price credit risk (such as the – risk adjusted return on capital models (RAROC)) and (iv) developing models to measure better the credit risk of oC128-balance sheet in- struments. In this paper we trace key developments in credit risk measurement over the past two decades and show how many of these developments have been reflect- ed in papers that have been published in the Journal of Banking and Finance over this period. In addition, we explore a new approach, and provide some empirical examples to measure the credit risk of risky debt portfolios (or credit concentration risk). 2. Credit risk measurement 2.1. Expert systems and subjective analysis It is probably fair to say that 20 years ago most financial institutions (FIs) relied virtually exclusively on subjective analysis or so-called banker ‘‘expert’’ systems to assess...

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Counterparty Credit Risk

I COUNTERPARTY CREDIT RISK BMI MASTERS THESIS April, 2009 Seyoum Zeleke Bekele SUPERVISOR: Erik Winands Faculty of Science Business Mathematics and Informatics De Boelelaan 1081a 1081 HV Amsterdam II I Preface This master‟s thesis is part of the BMI curriculum that is required to be delivered by the student in order to complete the program. A BMI thesis is basically a research project around a specific problem statement. The thesis is based on already available literature. However, the student can make use of computer generated data and simulation results. The thesis is written for an expert manager who has a general expertise in the subject area. It is assumed that the thesis has a practical benefit for the manager. I

would like to thank my supervisor, Erik Winands, for helping me choose the topic and guiding me throughout the writing of this thesis. I thank also Drs. Annemieke van Goor-Balk for providing me with necessary information and help facilitate my work. II Abstract One of the risks banks face is counterparty credit risk, which is the risk that results when a counterparty is unable or unwilling to meet agreed obligations. In particular, banks involved in over-the-counter (OTC) securities and derivatives transactions face this risk. In light of the current global financial crisis, which resulted in the bankruptcy of large banks, it is of great importance to give more attention to methods that help mitigate counterparty credit risk as well as to the modeling, measuring and pricing of this risk. According to IMFs Global Financial Stability Report (2008), there is a persistent and increasing concern about counterparty credit risks (CCR). This risk has increased significantly threatening the existence of big banks in a chain reaction as a result of a default of a counterparty. Financial institutions are required to have a minimum capital to shield against the default risk. Hence modeling CCR is important in order to determine the appropriate economic capital needed. In this thesis I will discuss in brief recent works about the modeling and pricing of CCR. This includes bringing together different modeling and measuring methods both at counterparty as well as portfolio level. The thesis also discusses the minimum required capital when one engages in over-the-counter (OTC) derivative contracts and techniques used to reduce exposure to this risk. The thesis has four main parts followed by a conclusion. In the first part Counterparty Credit Risk is described. Some OTC products will also be briefly discussed. Finally the risk measures used are defined. The second part introduces the general modeling and measuring of Counterparty Credit Risk and describes or analyzes the difference on the models used. Although it will not be in depth analysis models both at a counterparty levels and portfolio level will be presented. In addition to that a risk mitigating techniques in practice will be highlighted. In the third part I will focus on the credit derivative product called credit default swap (CDS). Here a recent model for CDS will be presented. Also pricing of the CDS using Monte Carlo simulation is discussed. The fourth part discusses the economic capital (EC), a measure of counterparty...

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Regulations Provide Whipsaw Calculation Safe Harbor for Cash

©2011 Wolters Kluwer. All rights reserved. 1 Benefit Practice Portfolios, Regulations Provide Whipsaw Calculation Safe Harbor for Cash Balance Plans (November 2011) Click to open document in a browser By Brian A. Benko ©2011 CCH. All Rights Reserved. Brian A. Benko is an Associate with the law firm of McDermott Will & Emery LLP, Washington, DC. As a member of the Benefits, Compensation, Labor & Employment Practice Group, Mr. Benko counsels clients on a variety of employee benefits matters related to pension plans, cash balance plans, 401(k) plans, executive compensation arrangements, and cafeteria and welfare plans. For additional information please contact Brian A. Benko at bbenko@mwe.com or (202) 756-8047. INTRODUCTION The Pension Protection Act of 2006 (the "PPA") added Section

411(a)(13) to the Internal Revenue Code of 1986, as amended (the "Code").1 Congress enacted Code Section 411(a)(13) to eliminate the "whipsaw calculation" for cash balance plans.2 Prior to the PPA, cash balance plans used the whipsaw calculation to convert a hypothetical account balance to an annuity payable at normal retirement age, and, then, discount the annuity to a lump sum. Code Section 411(a)(13) provides a safe harbor allowing a cash balance plan to distribute the current hypothetical account balance in the form of a lump sum distribution. Since Congress enacted the PPA in 2006, practitioners have struggled to apply the rules to cash balance plans—as the Treasury Department and the Internal Revenue Service (the "IRS") drafted regulations. In 2007, a set of proposed regulations interpreted the requirements for taking advantage of the whipsaw calculation safe harbor under Code Section 411(a)(13).3 On October 19, 2010, the Treasury Department and the IRS issued final regulations, which generally adopted the 2007 proposed regulations, and new proposed regulations.4 The new 2010 proposed regulations proffered new conditions and requirements for applying the whipsaw safe harbor. This Article explains the impact of the 2010 final and proposed regulations under Code Section 411(a)(13) on cash balance plans. The first part provides background on the fundamental features of cash balance plans, and reviews the scope of the 2010 final and proposed regulations. The second part analyzes the new 3-year cliff minimum vesting schedule for cash balance plans. The third part explains the whipsaw calculation-related rules and conditions included in the 2010 final and proposed regulations. The fourth part discusses the statutory effective dates and regulatory applicability dates for Code Section 411(a)(13). CASH BALANCE PLANS UNDER THE FINAL AND PROPOSED REGULATIONS The final regulations contain rules establishing the scope of the plans affected by the vesting and whipsaw calculation requirements under Code Section 411(a)(13). Statutory hybrid plans must comply with the requirements under Code Section 411(a)(13).5 A statutory hybrid plan is a type of defined benefit plan. The defining characteristic of a statutory hybrid plan is the type of formula used to determine a participant's benefit. For purposes of this Article, the benefit formula is called a statutory hybrid benefit formula that is a lump sum based-benefit formula. A plan need not include a lump-sum payment option to be a statutory hybrid plan.6 In general, cash balance plans use a lump sum based-benefit formula to determine a participant's benefit...

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