By Pension and Benefits Editorial Staff
The Treasury Department has denied the benefit reduction plan proposed by the American Federation of Musicians & Employers Pension Fund. In an August 11, 2020 letter, the Treasury Department said that the denial is based on the rescue plan’s failure to meet the requirements in the Multiemployer Pension Reform Act of 2014 (MPRA) for the suspension of benefits. The Treasury Department explained that, after reviewing the application and consulting with Pension Benefit Guaranty Corporation (PBGC) and Department of Labor (DOL), the Department determined that the proposed benefit suspensions were not “reasonably estimated to achieve, but not materially exceed, the level that is necessary to avoid insolvency.”
Specifically, the Treasury Department has determined that the mortality rate assumption and the new entrant assumption were not reasonable under the standards in the MPRA implementing regulations. The Application fails to satisfy the criteria of subparagraph (D) of Code Sec. 432(e)(9) because it does not comply with the limitation of clause (iv) of subparagraph (D), which requires that “[a]ny suspensions of benefits, in the aggregate . . . shall be reasonably estimated to achieve, but not materially exceed, the level that is necessary to avoid insolvency.” However, the Treasury Department notes that this denial does not address whether the application satisfies any of the other criteria of Code Sec 432(e)(9).
Standards used by Treasury Department. The Treasury Department evaluated the assumptions and methods used in the application based on the regulations. The regulations require that each of the actuarial assumptions and methods used for the required projections, as well as the combination of actuarial assumptions and methods, are reasonable, taking into account the experience of the plan and reasonable expectations. In applying the regulations, the Treasury Department referred to guidance provided by the professional standards that apply to the actuarial profession, which include the Actuarial Standards of Practice (ASOPs), as referenced in the regulations.
The Treasury Department has concluded that two of the key actuarial assumptions used for the cash flow projections in the application are not reasonable. Specifically, the mortality rate assumption and the assumption regarding the demographic characteristics of new entrants to the plan are not reasonable under the standards in the regulations.
Mortality assumptions. Mortality assumptions generally include both an assumption regarding the current mortality rate, which is reflected in base mortality tables, and an assumption about expected long-term improvements in longevity, which is reflected in a mortality improvement scale. The Treasury Department explained that Standard mortality tables are developed using relevant historic experience and demographic data for standard populations, such as white-collar workers in private pension plans. Generally, the selection of a mortality table, including a standard mortality table, must be supported by appropriate experience from the plan, including actuarially credible evidence demonstrating how the mortality experience used to develop the selected table is reflective of the mortality experience of the plan.
In this application, the mortality assumption used is not reasonable because it is based on a standard table that was used without adequate justification or a demonstration of the manner in which the table properly reflects the mortality experience of the Fund, according to the Treasury Department. In addition, when the Treasury Department requested additional information to support the use of the table, that information revealed that the Fund’s actuary did not take into account relevant historic and current demographic data when selecting the standard table and that the standard table significantly overestimates the rate at which Fund participants and beneficiaries will die.
The Fund’s use of the unadjusted RP-2014 Employee and Annuitant Mortality Tables (RP-2014 table) standard table is not reasonable, according to the Treasury Department. The application provided only limited support for the choice of this mortality assumption. In addition, the Fund’s use of headcount-weighted experience is not reasonable to support the use of that assumption. Because the mortality rate assumption used in the application was not consistent with historic and demographic experience relevant as of the measurement, the Treasury Department has concluded that it is not reasonable. Therefore, the proposed suspension does not satisfy the statutory requirement that it be reasonably estimated to avoid insolvency.
New entrant assumption. To project cash flows, an applicant must make an assumption regarding the demographic characteristics of plan participants, including the characteristics of employees who replace terminating and retiring workers or otherwise become active participants (i.e., future new entrants to the plan). In particular, a new entrant assumption must project the “entry age”—the assumed age at which new participants enter (or return to active status in) the plan.
The Treasury Department noted that the new entrant assumption for purposes of these cash flow projections must be developed in a refined manner that reflects expected cash flows. The Treasury Department explained that the new entrant assumption used in the application fails to take into account the prevalence of rehires, even though recent actuarial valuations clearly show that a significant portion of the new entrants each year are terminated vested participants who are rehired.
The application’s new entrant assumption is not reasonable because it does not take into account relevant historic and current demographic data (that is, data available regarding demographic characteristics of recent rehires) and it has a significant bias in that it underestimates the average entry age of new active participants, resulting in a significant understatement of benefit payments from the Fund. Specifically, it is not appropriate for the Fund to use a new entrant assumption that excludes recently rehired participants if doing so produces materially different results than use of a refined assumption. Thus, the Treasury Department decided that this assumption was not reasonable.
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