Pros & Cons of Cash Balance Plans - Scott C. Otermat & Associates

Plan Design The following provide general information for initial discussion with the plan actuary when establishing or reviewing a cash balance plan. Pros & Cons of Cash Balance Plans Pros 1. Cash Balance Plan are generally installed as an ad- dition to 401(k)s or profit sharing plans in order to increase deductions. 2. Costs can be skewed to older employees, who are generally the owners. 3. Cost savings due to partially vested terminations accrue to plan. 4. Excess investment earnings lower future costs. 5. Some pre-funding of benefits is allowed. This adds downside flexibility in the future. 6. Assets are invested as a whole, rather than indi- vidually, thereby reducing investment expenses, and avoiding fee disclosures to participants. 7. Contributions

can often be set to equal amounts for multiple owners of different ages. 8. Benefits are tied to Account Balances which look very much like 401(k) accounts, but which always show positive earnings. Cons 1. Benefit accruals are fixed, so a plan amendment is required to lower costs, unless some pre-funding has occurred. 2. These plans require the services of an actuary to determine contribution ranges and funding levels, so expenses may be higher than 401(k) plans. 3. Funding rules are quite involved. 4. Investment losses require higher future contribu- tions. 5. Cash Balance Plans are more complicated to ter- minate than 401(k) or Profit Sharing Plans. 6. PBGC premiums must be paid if covered by law. 7. Funding levels may restrict lump sum payouts, though this is more uncommon than for tradition defined benefit plans. 8. This type of plan cannot use a prototype docu- ment; the plan document must be individually de- signed. This requires the plan to be filed with the IRS when established or amended, incurring additional plan expense. Scott C. Otermat & Associates For more information, please contact us as (419) 332-0853 or scott@scoassociates.com...

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Managing Credit Risk - New York University

MANAGING CREDIT RISK: THE CHALLENGE FOR THE NEW MILLENNIUM Dr. Edward I. Altman Stern School of Business New York University Credit Risk: A Global Challenge In Low Credit Risk Regions (1998 - No Longer in 2003) • New Emphasis on Sophisticated Risk Management and the Changing Regulatory Environment for Banks • Enormous defaults and bankruptcies in US in 2001/2002. • Refinements of Credit Scoring Techniques • Large Credible Databases - Defaults, Migration • Loans as Securities • Portfolio Strategies • Offensive Credit Risk Products – Derivatives, Credit Insurance, Securitizations 2 Credit Risk: A Global Challenge (Continued) In High Credit Risk Regions • Lack of Credit Culture (e.g., Asia, Latin America), U.S. in 1996 - 1998? • Losses from Credit Assets

Threaten Financial System • Many Banks and Investment Firms Have Become Insolvent • Austerity Programs Dampen Demand - Good? • Banks Lose the Will to Lend to “Good Firms” - Economy Stagnates 3 Changing Regulatory Environment 4 1988 Regulators recognized need for risk-based Capital for Credit Risk (Basel Accord) 1995 Capital Regulations for Market Risk Published 1996-98 Capital Regulations for Credit Derivatives 1997 Discussion of using credit risk models for selected portfolios in the banking books 1999 New Credit Risk Recommendations • Bucket Approach - External and Possibly Internal Ratings • Expected Final Recommendations by Fall 2001 • Postpone Internal Models (Portfolio Approach) 2001 Revised Basel Guidelines • Revised Buckets - Still Same Problems • Foundation and Advanced Internal Models 2004 Final Draft of Consultative Paper • Final Version - June, 2004 • Implementation in 2007 Capital Adequacy Risk Weights from Various BIS Accords (Corporate Assets Only) Original 1988 Accord All Ratings 100% of Minimum Capital (e.g. 8%) 1999 (June) Consultative BIS Proposal Rating/Weight AAA to AA- A+ to B- Below B- Unrated 20% 100% 150% 100% 2001 (January) Consultative BIS Proposal AAA to AA- A+ to A- BBB+ to BB- Below BB- Unrated 20% 50% 100% 150% 100% 5 Altman/Saunders Proposal (2000,2001) AAA to AA- A+ to BBB- BB+ to B- Below B- Unrated 10% 30% 100% 150% Internally Based Approach Debt Ratings 6 Moody's S&P Aaa AAA Aa1 AA+ Aa2 AA Aa3 AA- A1 A+ A2 A A3 A- Baa1 BBB+ Baa2 Investment BBB Baa3 Grade BBB- Ba1 High Yield BB+ Ba2 BB Ba3 BB- B1 B+ B2 B B3 B- Caa1 CCC+ Caa CCC Caa3 CCC- Ca CC C CD Corporate Default Probabilities Typically Increase Exponentially Across Credit Grades (2001 Consultative Paper) 7 0 5 7 8 9 10 11 20 30 50 75 100 150 260 600 1000 AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- Probability of default Modified (2003) Corporate Risk Weight Curve 8 0% 5% 10% 15% 20% 25% 30% 35% 3 10 25 50 75 100 125 150 200 250 300 400 500 1000 2000 Probability of Default (bp) Cap i t al Req u i rem e n t Recent Basel Credit Risk Management Recommendations • Establishes a four-tier system for banks for use or not of internal rating systems to set regulatory capital. Ones that can set loss given default (LGD) estimates...

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Credit Risk Ratings, By-law #5

Credit Risk Ratings 1 One recommended risk measurement and monitoring technique to be used for loans other than personal and mortgage loans, is the technique of credit risk ratings. Risk rating involves the categorization of individual loans, based on credit analysis and local market conditions, into a series of graduated categories of increasing risk. Risk ratings are most commonly applied to all loans other than personal and residential mortgage/bridge loans. Risk ratings should be conducted: • at the time of application for all new or increased loan facilities • as part of the annual review process • in situations where new information is considered that may materially affect the credit risk of the loan A primary function of a risk

rating model is to assist in the underwriting of new loans. As well, risk rating assists management in predicting changes to portfolio quality and the subsequent financial impact of such changes. Risk rating can also lead to earlier responses to potential portfolio problems, providing management with a wider choice of corrective options and decreased exposure to unexpected credit losses. Finally, risk ratings are useful for pricing loans and regulating the commercial portfolio exposure to maximum levels of risk. Board policy should optimally set the maximum credit risk allowable by credit classes and aggregate maximum portfolio credit risk. The extent of gradation (number of categories) of a risk rating system should be reflective of the size and complexity of the credit union's commercial and agricultural loan portfolio. Generally, a larger and more extensive a credit portfolio may require a more sophisticated risk rating system including a greater graduation of risk ratings. In many situations, however, a system comprised of six risk levels of increasing credit risk is appropriate. Under this system, the lowest risk rating (1) is assigned to undoubted borrowers with vitually no risk. The highest risk rating (6) is assigned to borrowers where there is little or no likelihood of repayment. Loans should only be granted for risk ratings of 1, 2 (low risk) or 3 (normal risk). Ratings of 4, 5 and 6 are reserved for existing loans where the risk rating has deteriorated from the time of the original approval. Risk rating 4 is a “cautionary” rating assigned to higher risk loans. Loans in this category should be placed on a “watch list” for increased monitoring. Risk rating 5 is for “unsatisfactory” loans that are impaired in accordance with DICO By-law No. 6. Schedule 1 below provides a more detailed overview of a risk rating model which has six risk rating categories combined with risk rating trends. The table also includes the types of assessment criteria or considerations which should be used to determine risk ratings. Compliance with the risk rating requirement as outlined in Schedule 1 satisfies the "credit rating band" requirement found in FSCO's Lending and Investment Guideline and meets DICO’s expectations for an appropriate risk rating model. Credit Risk Ratings 2 Schedule 1: Sample Risk Rating Model Risk Rating Attributes 1 Undoubted • Virtually no risk • Government borrower • Full cash security • Strongly capitalized • Outstanding management 2 Low • Minimal risk...

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Cash Balance Pension Plans.pdf - MBM Advisors, Inc.

What is a cash balance plan? There are two general types of pension plans: Defined Benefit Plans (DB) and Defined Contribution Plans (DC.) In general, defined benefit plans provide a specific benefit at retirement for each eligible employee, while defined contribution plans specify the amount of contributions to be made by the employer toward an employee’s retirement account. In a defined contribution plan, the actual amount of retirement benefits provided to an employee depends on the amount of the contributions as well as the gains or losses of the account. A cash balance plan is a hybrid between a DC plan and a DB plan. It is legally a DB plan that looks like a DC plan. Therefore, the DB

limits apply, i.e., the annual contribution on behalf of any participant is not limited to the DC maximum annual addition of $51,000* in 2013. Instead, the ultimate retirement benefit cannot exceed the DB limit for an annual benefit at retirement of $205,000* in 2013. That maximum benefit is equivalent to a lump sum amount of approximately $2.5 million at age 62. A theoretical account balance (TAB) is maintained on behalf of each participant. 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 often indexed to a widely used measure, such as 30-year U.S. Treasury Securities, or can be a fixed market rate of interest. The compensation credit and the interest credit are guaranteed to the employee. That is, the amount that the employee will receive from the plan is defined. If the plan earns more or less than the interest credit, future contributions made by the employer may be increased or decreased but the participants’ TABs are not affected. How do cash balance plans work? In a typical cash balance plan, a participant’s account is credited each year with a pay credit (such as 5 percent of compensation from his or her employer) and an interest credit (either a fixed rate or a variable rate that is linked to an index such as a Treasury bill rate). Increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance. For example, assume that a participant has an account balance of $100,000 when he or she reaches age 65. If the participant decides to retire at that time, he or she would have the right to an annuity. Such an annuity might be approximately $10,000 per year for life. Cash Balance Pension Plans...

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IRS issues final and proposed regulations for hybrid plans

©2011, The Prudential Insurance Company of America, all rights reserved. Prudential, the Prudential logo, and the Rock symbol are service marks of The Prudential Insurance Company of America, Newark, NJ, and its related entities, registered in many jurisdictions worldwide. Important information Plan design February 2011 IRS issues final and proposed regulations for hybrid plans Who’s affected These developments affect sponsors of and participants in hybrid plans, such as cash balance plans and pension equity plans. They also affect plan sponsors that are considering converting a traditional defined benefit plan to a hybrid plan design. Background and summary Hybrid plans, such as cash balance and pension equity plans, are common plan designs. A hybrid plan is a retirement plan that combines

features of a defined contribution plan and a defined benefit plan. The enactment of the Pension Protection Act of 2006 (PPA) into law on August 17, 2006, clarified the legal status of cash balance and other hybrid plan designs created after June 29, 2005, if they satisfy certain requirements. To assist plan sponsors in designing and administering these plans, the IRS issued Notice 2007-6 and proposed regulations in 2007. Recently, the IRS issued final hybrid plan regulations to reflect the changes made by PPA. The final regulations incorporate the transitional guidance provided under Notice 2007-6 and generally adopt the provisions of the proposed rules. They offer guidance on a variety of issues regarding: Vesting; Age discrimination; Conversions; and Market rate of return. At the same time, the IRS issued additional proposed regulations. These rules provide guidance on certain issues that are not addressed in the final regulations such as: Interest crediting rates; Changes in interest crediting basis; and Additional conversion guidance. Action and next steps Sponsors of cash balance and pension equity plans should carefully read the information contained in this Pension Analyst. We encourage plan sponsors to discuss the contents of this publication with their legal counsel and their plan‟s enrolled actuary to determine how this most recent guidance impacts their plans. In some situations, plan amendments may be needed. The final regulations generally apply to plan years beginning on or after January 1, 2011. The proposed regulations apply to plan years beginning on or after January 1, 2012, but may be relied upon until then. In this issue Final regulations 2 ©2011, The Prudential Insurance Company of America, all rights reserved. Prudential, the Prudential logo, and the Rock symbol are service marks of The Prudential Insurance Company of America, Newark, NJ, and its related entities, registered in many jurisdictions worldwide. February 2011 Definitions Vesting Safe harbor for age discrimination Conversion protection Market rate of return Revisions to the interest crediting rate Proposed regulations Market rate of return Changes in interest crediting rates Additional conversion guidance Additional benefit calculation guidance Effective dates Next steps Related document Highlights of final and proposed rules for hybrid plans Hybrid plans, such as cash balance plans and pension equity plans (PEPs), are a special type of defined benefit pension plan that combines features of a defined benefit plan and a defined contribution plan. Most hybrid plans express benefits as the value of a...

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Guidelines on Credit Risk Management Rating Models and Validation

Guidelines on Credit Risk Management Rating Models and Validation ≈√ These guidelines were prepared by the Oesterreichische Nationalbank (OeNB) in cooperation with the Financial Market Authority (FMA) Published by: Oesterreichische Nationalbank (OeNB) Otto Wagner Platz 3, 1090 Vienna, Austria Austrian Financial Market Authority (FMA) Praterstrasse 23, 1020 Vienna, Austria Produced by: Oesterreichische Nationalbank Editor in chief: Gu‹nther Thonabauer, Secretariat of the Governing Board and Public Relations (OeNB) Barbara No‹sslinger, Staff Department for Executive Board Affairs and Public Relations (FMA) Editorial processing: Doris Datschetzky, Yi-Der Kuo, Alexander Tscherteu, (all OeNB) Thomas Hudetz, Ursula Hauser-Rethaller (all FMA) Design: Peter Buchegger, Secretariat of the Governing Board and Public Relations (OeNB) Typesetting, printing, and production: OeNB Printing Office Published and produced at: Otto Wagner

Platz 3, 1090 Vienna, Austria Inquiries: Oesterreichische Nationalbank Secretariat of the Governing Board and Public Relations Otto Wagner Platz 3, 1090 Vienna, Austria Postal address: PO Box 61, 1011 Vienna, Austria Phone: (+43-1) 40 420-6666 Fax: (+43-1) 404 20-6696 Orders: Oesterreichische Nationalbank Documentation Management and Communication Systems Otto Wagner Platz 3, 1090 Vienna, Austria Postal address: PO Box 61, 1011 Vienna, Austria Phone: (+43-1) 404 20-2345 Fax: (+43-1) 404 20-2398 Internet: http://www.oenb.at http://www.fma.gv.at Paper: Salzer Demeter, 100% woodpulp paper, bleached without chlorine, acid-free, without optical whiteners DVR 0031577 The ongoing development of contemporary risk management methods and the increased use of innovative financial products such as securitization and credit derivatives have brought about substantial changes in the business environment faced by credit institutions today. Especially in the field of lending, these changes and innovations are now forcing banks to adapt their in-house software systems and the relevant business processes to meet these new requirements. The OeNB Guidelines on Credit Risk Management are intended to assist practitioners in redesigning a bankC213s systems and processes in the course of implementing the Basel II framework. Throughout 2004 and 2005, OeNB guidelines will appear on the subjects of securitization, rating and validation, credit approval processes and management, as well as credit risk mitigation techniques. The content of these guidelines is based on current international developments in the banking field and is meant to provide readers with best practices which banks would be well advised to implement regardless of the emergence of new regulatory capital requirements. The purpose of these publications is to develop mutual understanding between regulatory authorities and banks with regard to the upcoming changes in banking. In this context, the Oesterreichische Nationalbank (OeNB), Aus- triaC213s central bank, and the Austrian Financial Market Authority (FMA) see themselves as partners to AustriaC213s credit industry. It is our sincere hope that the OeNB Guidelines on Credit Risk Management provide interesting reading as well as a basis for efficient discussions of the cur- rent changes in Austrian banking. Vienna, November 2004 Univ.Doz.Mag.Dr.Josef Christl Member of the Governing Board of the Oesterreichische Nationalbank Dr.Kurt Pribil, Dr. Heinrich Traumu‹ller FMA Executive Board Preface Guidelines on Credit Risk Management 3 I INTRODUCTION 7 II ESTIMATING AND VALIDATING PROBABILITY OF DEFAULT (PD) 8 1 Defining Segments for Credit Assessment 8 2 Best-Practice Data Requirements for Credit Assessment 11 2.1 Governments and the Public Sector 12 2.2 Financial Service Providers 15...

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Credit Risk Management - Deposit Insurance Corporation of Ontario

Credit Risk Management Chapter 5 Reference Manual – Spring 2005 Page 5-1 Credit Risk Management Section Topic Page 5000 Executive Summary………………………...………………... 5-2 5100 Legislative Summary…………………………………………. 5-3 5200 Policy…………………………………………………………… 5-9 5201 Credit Management Philosophy…………………………….. 5-10 5202 Authorized Credit Instruments………………………………. 5-11 5203 Loan Volumes, Portfolio Mix and Industry Classification…. 5-19 5204 Volume Restrictions on High Risk Loans…………………... 5-21 5205 Connected, Restricted Party and Staff Loans……………... 5-22 5206 Lender Approval Limits………………………………………. 5-24 5207 Lending Criteria……………………………………….………. 5-25 5208 Loan Process………………………………………….………. 5-26 5209 Securing Loans……………………………………….………. 5-27 5210 Delinquent and Impaired Loans…………………………….. 5-28 5211 Loan Rewrites and Restructures……………………………. 5-29 5300 Planning………………………………………………………... 5-32 5400 Risk Measurement and Board Reporting…………………... 5-33 5401 Portfolio Mix, Volume and Yields……………………………. 5-37 5402 Credit Risk Ratings and Watchlist…………………………... 5-39 5403 Delinquent, Impaired

and Formally Restructured Loans…. 5-41 5404 Connected, Restricted Party and Large Loans……………. 5-42 5405 Rewritten, Restructured and Consolidated Loans………… 5-43 5406 Loan Monitoring……………………………………………….. 5-44 5500 Risk Management…………………………………………….. 5-48 5501 Qualified and Competent Lenders………………………….. 5-49 5502 Loan Approvals and Disbursements Process……………... 5-53 5503 Loan Documentation…………………………………………. 5-55 5504 Credit Investigation and Analysis…………………………… 5-59 5505 Loan Security………………………………………………….. 5-67 5506 Loan Renewals………………………………………………... 5-79 5507 Collection of Delinquent Loans……………………………… 5-81 5508 Use of Real Estate Appraisers………………………………. 5-86 5509 Use of Lawyers for Mortgage Transactions……………….. 5-87 Credit Risk Management – Executive Summary Section 5000 Reference Manual – Spring 2005 Page 5-2 Executive Summary Sound credit management is a prerequisite for a financial institution’s stability and continuing profitability, while deteriorating credit quality is the most frequent cause of poor financial performance and condition. The prudent management of credit risk can minimize operational risk while securing reasonable returns. Ensuring lending staff comply with the credit union's lending licence and by-laws is the first step in managing risk. The second step is to ensure board approved policies exist to limit or manage other areas of credit risk, such as syndicated and brokered loans, and the concentration of lending to individuals and their connected parties (companies, partnerships or relatives). The board and management should also set goals or targets for their loan portfolio mix, as part of their annual planning process. The loan portfolio should be monitored on an ongoing basis, to determine if performance meets the board's expectations, and the level of risk remains within acceptable limits. Standardized lending procedures should be adopted to reduce risk of transactional error, and ensure compliance with regulatory requirements and board policy. Approval and disbursements, documentation, lending staff and loan security are just some of the procedures recommended in this chapter. A credit union can meet standards of sound business and financial practices by ensuring it has developed and implemented credit policies, risk and performance measurement techniques, and risk management procedures comparable to those contained in this chapter. Policies, measurement techniques and procedures should be appropriate for the size Credit Risk Management – Legislative Summary Section 5100 Reference Manual – Spring 2005 Page 5-3 Legislative Summary Management and lending staff should be apprised of the comprehensive lending legislation set out in the Act and Regulation 76/95, as well as relevant legislation in other Acts. Members of the board should also be familiar with the major aspects of lending legislation. Referring to or repeating...

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