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Aligning Fiduciary Duties with
Pension Risk ManagementOctober 16, 2017 Mark Simons
Of Counsel, Morgan Lewis & Bockius, LLP
Russ Proctor, CFA, FSA, EADirector, Pacific Life Insurance Co.
Marty MeninDirector, Pacific Life Insurance Co.
Agenda
• Aligning Fiduciary Duties with Pension Objectives
• Working with Independent Fiduciaries and Other
Intermediaries to Manage Plan Risk
• Solutions to Manage Pension Risk
• Solutions to Help Defined Contribution Participants
Manage Longevity Risk
ERISA Fiduciary Duties – What You Need to Know
• ERISA’s fiduciary standards of prudence, exclusive
benefit and diversification
• Requirement to follow written plan documents
• ERISA’s conflict of interest and self-dealing
prohibited transaction rules
• Key words: Procedural prudence, 95-1, fiduciary
delegation, risk management and documentation
Fiduciary Risk Management: Use of Independent
Fiduciaries, Advisors and Other Intermediaries
• What does it mean to “outsource” fiduciary duties?– Key words: OCIOs, outsourced named fiduciaries,
3(38) vs. 3(21) advisors
• What responsibilities remain?– Selection and monitoring
– Other responsibilities are based on specifics – contract terms are important
• What we’re seeing…
De-Risking Road Map
30%
40%
10%
20%
Active
Vested Terminated
Retirees with Larger Monthly
Benefits
Retirees with Smaller Monthly Benefits
LDI or Insured
LDI
Buy-In
Buy-Out
Lump-Sum
PRT Selection Process
• Selection of intermediaries
• Review of insurance companies (95-1)
• Final bid day
• Selection of insurance company or companies
• Transfer of participant data
Historical SalesTerminal Funding and Buy-Outs ($B)
LIMRA Secure Retirement Institute Group Annuity Risk Transfer Survey, through December 31, 2016
$0
$2
$4
$6
$8
$10
$12
$14
$16
2009 2010 2011 2012 2013 2014 2015 2016
$Billions
Excludes $33.6 B for
GM and Verizon
Volatile Equity Market Environment
S&P 500® Index - Jan 1995 to July 2017¹
1S&P 500® is a registered trademark of Standard & Poor's Financial Services LLC. Index value at beginning of month.
0
500
1000
1500
2000
2500
3000
Interest Rate Volatility – 10YR T-Note
Source: US Department of Treasury, June 30, 2017
2.45% at
6/30/17
2.18% 5-yr Avg.
July-17
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
July-12 July-13 July-14 July-15 July-16
10 yr T-Note - 5 Year History
10 yr T-Note 5 Yr Avg
Pension Risk Market Environment
Source: Milliman 100 Pension Funding Index, July 2017.
50
60
70
80
90
100
110
-500
-450
-400
-350
-300
-250
-200
-150
-100
-50
0
50
100D
ec-
00
Jun
-01
De
c-0
1
Jun
-02
De
c-0
2
Jun
-03
De
c-0
3
Jun
-04
De
c-0
4
Jun
-05
De
c-0
5
Jun
-06
De
c-0
6
Jun
-07
De
c-0
7
Jun
-08
De
c-0
8
Jun
-09
De
c-0
9
Jun
-10
De
c-1
0
Jun
-11
De
c-1
1
Jun
-12
De
c-1
2
Jun
-13
De
c-1
3
Jun
-14
De
c-1
4
Jun
-15
De
c-1
5
Jun
-16
De
c-1
6
Jun
-17
Fun
ded
Rat
io (
%)
Fun
ded
Sta
tus
( $
bill
ion
s)Milliman 100 Pension Funding Index Pension Surplus/Deficit and Pension
Funded Ratio
Funded Status Funded Ratio
PBGC Premium Increases
Flat Rate Premium (Per Participant)
$35 $42
$49
$57 $64
$69 $74
$80
$-
$10
$20
$30
$40
$50
$60
$70
$80
$90
2012 2013 2014 2015 2016 2017 2018 2019
Premium rates, Pension Benefit Guaranty Corporation website. December 31, 2016
0.9%
1.4%
2.4%
3.0%3.4%
3.9%
4.4%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
2013 2014 2015 2016 2017 2018 2019
PBGC Premium Increases
Variable Rate Premium (Unfunded Liability)
Premium rates, Pension Benefit Guaranty Corporation website. December, 2016
Assumes 3% annual increase in National Average Wages
Buy-Out: Key Features
• Can cover part or all of the plan participants
• For Covered Participant Group:– Transfers all pension obligations and risks
to insurer
– Removes the pension liability from plan sponsor’s balance sheet
– Plan sponsor no longer subject to PBGC premiums and other expenses
– Insurer provides all annuitant servicing
1. Liability for accounting based on current market discount rate for retiree liability
2. Estimated administrative expenses including actuarial fees and PBGC fixed-rate premium of $80 per person
3. Estimated investment management fees (assumes 50 bps per year)
4. Estimated cost of defaults on high-quality bond portfolio (assumes 30 bps per year)
5. This is the true economic cost if the plan sponsor retained the liability
100%5%
5%3% 113%
1. Retiree GAAP Liability 2. Admin & PBGC Expenses
3. Investment Management
4. Investment Default Risk
5. Retiree Economic Cost
Liab
ility
(C
ost
)For illustrative purposes only.
Case Study: Reducing Expense With a Buy-Out
Economic Cost of Retiree Liability (Small Benefits) with RP2014
Indirect DollarPlan Sponsor Cost
Direct DollarPlan Sponsor Cost
Plan Sponsors Adopt RP2014 Mortality
Annuity cost
may be < 105%
Buy-In vs. Buy-Out: What is the Difference?
• Buy-In is similar to Buy-Out except:
– Settlement accounting?
– Contract value remains an asset of the plan/trust
– Change in plan’s funded status?
– No communication required to participants
– Revocable?
• May be converted to Buy-Out
When Does a Buy-In Make Sense?
• Qualified Plans– Underfunded plan
– Unrecognized losses
– Not ready to terminate
• Nonqualified Plans– Defined benefit SERP
Buy-In Case Study #1:
Delay Recognition of Settlement Loss
• Buy-In purchased in August 2015
• Buy-In contract covered current retirees
• Converted to buy-out in April 2016
• Settlement accounting triggered in 2016 at conversion
• Loss recognized in 2016 instead of 2015
• Plan terminated in 2016
For illustrative purposes only.
How Long Will You Live?
Male 22 Years
Female 25 Years
Age 87
Age 90
Source: Society of Actuaries. “RP2014 and MP 2014,” October 2014
50% Probability of living to future age from 65
How Long Will You Live?
Male 22 Years
Female 25 Years
Age 87
Age 90
Source: Society of Actuaries. “RP2014 and MP 2014,” October 2014
50% Probability of living to future age from 65
Last survivor of a couple 29 Years Age 94
How Long Will You Live?
Male 22 Years
Female 25 Years
Age 87
Age 90
Source: Society of Actuaries. “RP2014 and MP 2014,” October 2014
50% Probability of living to future age from 65
Last survivor of a couple 29 Years Age 94
Age 100Last survivor of a couple – 20% chance of living > 35 Years
20% Probability of living to age 100 from 65
Guaranteed1 Lifetime Income Options for DC plan
• Few DC plans provide access to an annuity
– In Plan
– Out of Plan
• Rollover to IRA - Often only option
– May rollover entire account even though only portion
used for annuity
– Retail annuities typically cost more than institutional
annuities
1Guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company.
Should More Money Stay in DC plan?
• New DOL fiduciary rule may reduce IRA rollovers by 50%– According to The Cerulli Report – “US Evolution of the
Retirement Investor 2016”
• Best interest of participant?
• IRAs have higher average expense ratio– 0.71% IRA vs 0.54% 401(k) (Investment Company Institute)
• Good for DC plan– More assets = lower average expense through economies of
scale
Advantages of Guaranteed Lifetime Income
Options in DC plan
• Plan can negotiate lower or no commissions
• Receive wholesale pricing
• Retain non-annuitized assets in plan
– lower average expense for participants
Fiduciary Duties of Guaranteed Lifetime Income
Options in DC plan
• Communication
• Safety of Insurance company
• Offer more than one company?
• Administration/Coordination of quotes
• Recent Treasury and DOL guidance
• Role of outsourcing
• Portability
BiographiesMark Simons
Mark is of counsel in the top-ranked benefits practice of Morgan, Lewis & Bockius LLP, with 27 years of experience in advising clients on matters related to qualified and non-qualified retirement plans. In particular, Mark advises plan sponsors on matters related to fiduciary governance and regulatory compliance under Titles I and II of ERISA, and has assisted a wide variety of corporate plan sponsors and related fiduciaries in de-risking their tax-qualified defined benefit plans.
Russ Proctor, FSA, CFA, EA, MAAA
Russ joined Pacific Life in 2011 as a director in the Retirement Solutions Division. He is responsible for consulting with companies to reduce and remove financial risk inherent in their pension plans through the Pacific Life buy-out, buy-in, and insured LDI solutions. Russ also works with companies who have defined contribution plans, such as a 401(k) or 403(b) plan, to provide guaranteed lifetime income options for plan participants.
Prior to joining Pacific Life, Russ was a retirement consultant with more than 24 years of experience, most recently as a principal with Mercer Human Resource Consulting. He provided strategic retirement consulting on all aspects of pension, 401(k), and executive retirement plans. He also conducted asset-liability modeling studies for clients and co-authored several articles including one on Liability Driven Investing.
Russ holds a Bachelor of Science degree in actuarial science from Drake University. He is a Fellow of the Society of Actuaries (FSA), a Fellow of the Conference of Consulting Actuaries (FCA), an Enrolled Actuary (EA) and a Member of the American Academy of Actuaries (MAAA). He is also Chartered Financial Analyst Charterholder (CFA).
Biographies
Marty Menin
Marty joined Pacific Life in 2012 as a director in the Retirement Solutions Division. He is responsible for consulting with
companies to customize solutions that solve the financial risk inherent in their pension plans through the Pacific Life
suite of pension-risk products. Marty also works with companies who have defined contribution plans, such as 401(k)
or 403(b) plans, to provide guaranteed lifetime income options for plan participants.
Prior to joining Pacific Life, Marty held a variety of positions in the insurance and employee benefits industry for firms
such as Prudential, Mullin/TBG, Marsh & McLennan, Merrill Lynch, and MetLife.
Marty holds a Bachelor of Science degree in mathematics and economics from University of California, Los Angeles.
Pacific Life Insurance CompanyInstitutional & Structured Products
700 Newport Center DriveNewport Beach, CA 92660
(877) 536-4382, Option 1 • www.PacificLifePRT.com [email protected]
This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or attorney.
Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make
recommendations regarding insurance or investment products. Only an advisor who is also a fiduciary is
required to advise if the product purchase and any subsequent action taken with regard to the product are in
their client’s best interest.
Insurance products are issued by Pacific Life Insurance Company in all states except New York. Product
availability and features may vary by state. Pacific Life is solely responsible for the financial obligations
accruing under the products it issues. rantees are backed by the financial strength and claims-paying ability
of the issuing insurance company.