Csp Q08

Front 1

QBS 8: 1 of 17
Different types of pension freeze

Back 1

1) Traditional freeze
a) Hard freeze: Freeze both future service and pay accruals
b) Soft freeze: Freeze future service only
2) Nontraditional
a) Freeze new entrants
b) Freeze new entrants and give existing employees a choice
c) Grandfather portion of existing employees, everyone else frozen
d) Delayed freeze: Announce plan to freeze at a later date

Front 2

QBS 8: 2 of 17
Reasons for a nontraditional freeze

Back 2

1) Balance cost, morale and employee perceptions
2) Concerned about older, longer service employees

Front 3

QBS 8: 3 of 17
Difference between a freeze and plan termination

Back 3

1) Company still controls plan assets under a freeze
2) Must pay benefits immediately under a plan term
a) Lump sums
b) Purchase annuities

Front 4

QBS 8: 4 of 17
Why would a company freeze versus terminate

Back 4

1) Termination cost too high or out of reach
a) Will terminate when assets and/or interest rates more favorable

Front 5

QBS 8: 5 to 9 of 17
Possible reasons a healthy company might freeze their DB plan (1 to 5 of 5)

Back 5

1) Need to reduce total compensation due to domestic or global competition
a) Cost may be lower and more predictable with DC
2) Maintain existing compensation levels given increases in health care costs
3) Financial pressure
a) Economic risk
b) Demographic risk
c) Regulatory risk
d) Accounting standards risk
e) Budgeting and predictability risk
f) No underfunded liabilities reported on financial statements
g) Lower contributions as a percentage of pay
4) Two-tiered system
a) Majority of benefit provided through nonqualified plan
b) Qualified plan limits make less relevant for high paid executives
5) Change in the relationship between employer and employees
a) Fewer lifetime workers today
b) More mobile workforce
c) Employers less paternalistic
6) New tax laws and funding regulations
7) Workers preference for DC
- Can be influenced by
a) Employee's aversion to risk
b) Feelings toward benefit security
c) Flexibility of more investment options and personal control
d) Portability
e) Simplicity
f) Tax advantages
g) Economic growth
8) Level of barriers from regulation
- Less regulation means can design plan in line with HR objectives
- May push funding closer toward a member's retirement
9) Taxation (encourages savings)
- Lack of tax incentives for employee contributions in DB plans
10) Proportion of unionization
11) Increasing complexity and cost of administering DB plans
12) Members don't fully perceive the value of DB plan

Front 6

QBS 8: 10 to 12 of 17
Additional items for consideration both before and following a plan freeze (1 to 3 of 3)

Back 6

1) Consider revising economic and demographic assumptions
a) Turnover will change as closed group ages
b) Salary increase assumption will also change and may decrease with time
c) Early retirement may become less likely
d) Consider impact of other retirement benefits such retiree medical freeze on retirement age
e) Disability incidence may drop
2) Review plan's duration
3) Review EROA if investment strategy changed
4) Impact on future cash flows paid from the plan
5) Don't make unnecessary contributions to the plan if sponsor doesn't own surplus
6) May have nondiscrmination issues
a) Closed group may become more concentrated with HCEs
7) Communicating change to participants
8) Reportable events to the government
9) Requirement to vest nonvested participants
10) Accounting implications of conversion
a) Curtailment rules may apply if future years of service covered under DC
b) Settlement accounting may apply if DB benefit
c) Special termination rules may apply if enhancements are included in the conversion values
11) Good communication, otherwise
a) Employee may misinterpret the employer's objectives
b) Ee may make poor decision regarding DB vs. DC choice
c) May not manage contribution level and investment choices going forward

Front 7

QBS 8: 13 of 17
DC formula following a plan freeze should reflect (also applies in a non-freeze setting)

Back 7

1) Employer's competitive position with respect to the contribution level
2) It's competitive position with respect to cost
3) Desired balance between various elements of the total rewards package
4) The underlying message conveyed by the DC formula
5) Ees previously covered by DB plan are not significantly disadvantaged by the new DC plan

Front 8

QBS 8: 14 of 17
Types of DC formulas

Back 8

1) Automatic, uniform employer contribution for all employees
2) Automatic employer contribution graded by years of service or points
3) Profit sharing based contribution
4) Matching contributions
5) Combination of the above

Front 9

QBS 8: 15 of 17
Treatment of Current DB Members-Questions Employer Should Answer Before Implementing DB and DC Conversion

Back 9

1) Will the change be mandatory or voluntary
2) Will all or some plan members be offered a choice between DB or DC for future service
3) Will all or some plan members be offered a choice between DB or DC for past service

Front 10

QBS 8: 16 and 17 of 17
Common DB to DC Conversion Approaches
(1 and 2 of 2)

Back 10

1) Apply to new hires if concerned about
a) Providing comparable cost to existing ees
b) DC conversion values being too high
c) Short-term accounting implications of DC conversions
2) Retain DB for past service if concerned about cost of converting DB benefit to an opening DC
3) Grandfather ees based on age/service if concerned about replacement ratio for members near retirement or provide enhanced DC coverage
- Advantage - Eases administration and provides protection
- Disadvantage - Does not benefit employees who want DC plan
4) If want to reduce DB commitment quickly convert DB to an opening balance for DC plan
5) If want to provide flexibility then provide ees choice between DB and DC coverage