7 - Defined Benefit Plan Overview II

Question 1

A ______ is a promise by an employer to pay a periodic benefit (usually for life) to employees who meet the requirements set forth in the plan. For a given benefit, the amount of annual benefit payments under the plan depends upon _____________. This, in turn, depends upon the rate at which _________ and the rate at which new employees are added to the retirement rolls. since the average life expectancy for a 65-year-old person is about 15 years, it is quite likely that for some time after the plan is established, more ____ members will be added to the retired employee group than will be removed from the group as a result of death.

Answer 1

• pension plan
• the number of retired workers
• already retired workers die
• new

Question 2

Under a typical pension plan, how long will the annual benefit payout continue to increase before it becomes relatively stable?

Answer 2

point at which retired workers dying is about equal to the number of new retirees

Question 3

The ultimate cost of the plan is equal to _____________ over the total life of the plan. (formula)

Answer 3

cost = benefits paid + administrative expenses - investment earnings

Question 4

There are several steps involved for the pension actuary to calculate an estimate of the ultimate cost of a pension plan.

• Estimates of the various components that determine the ultimate cost of a pension plan must be calculated. These would include:
  
  1. Estimates of the ____ paid to plan participants
  2. Estimates of plan _____
  3. Estimates of ________ for pension plan assets.
• Calculation of these estimates requires certain information. For instance, the estimate of benefits paid to plan participants depends on:
  
  1. The benefit ______ of the pension plan
  2. The ________ of the participants in the plan (age, sex, salary and length of service)
  3. ________ used to predict the amount of future benefits.

Answer 4

benefits

expenses

expected investment returns

provisions

characteristics

Actuarial assumptions

Question 5

Once an estimate of the ultimate cost of the pension plan is determined, prior to the Pension Protection Act (PPA) of 2006, the next step was to determine the __________ to pay for the estimated cost in an orderly manner. PPA, instead, places emphasis in assuring that a plan is funded on a ______ basis rather than spreading its costs during future years.

Answer 5

contributions required

termination

Question 6

Two important points should be made regarding the choice of assumptions for the calculation of estimated pension costs.

1. The flexibility available in choosing a particular set of actuarial assumptions depends in large part on the __________ involved. The greatest flexibility is available under ______ and under unallocated ______ contracts; while under _______ policy plans and group permanent and group deferred annuity instruments, employers have little flexibility.
2. The choice of a particular set of assumptions does not normally _____ the ultimate cost of the plan. In addition, _____ radically changed some of the flexibilities permitted in making actuarial assumptions

Answer 6

• funding instrument
• trust fund plans
• group pension
• fully insured individual
• alter
• PPA

Question 7

What factors enter into the determination of the number of employees who will be eligible for benefits under a pension plan?

• ______ rates among active employees (PPA removed the proposed Internal Revenue Service (IRS) rule requiring the use of Retirement Plan (RP)-200 Mortality Tables published by the Society of Actuaries. As mandated by PPA, the IRS proposed tables for use in these situations. Also, under strictly defined conditions, plan sponsors can use plan-specific tables.)
• Rates and duration of ________ among active employees under a plan that offers a benefit
• _____ and _____ of employment (a cost-reducing factor for affected individuals who do not qualify for full and immediate vesting)
• Rates of retirement at different _____ .

Answer 7

Mortality

disabilities

Layoffs / voluntary terminations

ages

Question 8

The plan actuary must establish two sets of probabilities in evaluating the cost of providing a disability benefit.

1. First, a ___________ of disabilities of the nature entitling the disabled employee to a benefit under the plan must be estimated. These will vary with the plan’s definition of disability, the age and sex composition of the covered employee group, the nature of the employment, and the general level of economic activity.
2. Having determined the probable incidence of disability, the actuary must then project ___________. This will be affected by factors such as reemployment opportunities and the mortality rates of disabled workers.

Answer 8

• rate of occurrence (frequency)
• the duration of the disability

Question 9

The amount of benefit paid under the plan is affected by the length of time that retired workers receive their pension benefits. The length of the benefit period depends on the ______ of retired workers and the normal _________. Therefore, an assumption must be made regarding _______ among retired lives.

Answer 9

longevity

annuity form

mortality

Question 10

Projecting benefit levels is more difficult under some benefit formulas than others.

• The least difficult formula is one that provides a _______ for all retired workers
• On the other hand, if the benefit formula calls for a pension benefit related to ________, cost projections may include an assumption regarding expected future increases in the salaries of covered employees.

Answer 10

flat benefit

compensation

Question 11

Ultimate pension plan costs are increased by the amount of expenses incurred in administering the plan. The major types of administrative costs include: (4)

Answer 11

1. Actuarial expenses
2. Legal expenses
3. Administrative expenses
4. Investment expenses.

Question 12

The investment income earned on the accumulated assets of a funded pension plan reduces ________ of the plan.

Answer 12

the ultimate cost

Question 13

The selection of an appropriate investment return assumption should take into account the ______ of the fund, the anticipated investment _____ of the plan trustees, current and projected long-term rates of return, and any other factors that might affect the future pattern of investment ______ of the fund.

The choice of an appropriate rate of investment return is particularly difficult if a sizable portion of the assets is invested in ________, since these investments are subject to significant fluctuations in value. in addition to having an impact on the selection of an investment return assumption, investments in equities raise the rather difficult issue of when to recognize ___________.

Answer 13

size

policy

earnings

common stocks

unrealized capital gains or losses.

Question 14

Describe the evaluation of plan assets’ fair market values required by PPA.

PPA mandates that assets and liabilities be smoothed over a period of a little more than ___ years and only if the smoothed value is within the range of ______ of the fair market value of plan assets on the plan’s valuation date.

Prior law allowed for assets averaging (smoothing) over ____ years and for liabilities over ____ years. Also, prior law allowed for smoothing techniques that produced actuarial asset values within a range of 80% to 120% of current fair market value.

Answer 14

two

90% to 110%

five

four

Question 15

In the past, actuarial techniques were used to determine how the estimated costs of the plan were to be spread over future years. An _________ method was a particular actuarial technique used to determine how the estimated costs of a pension plan were to be spread over future years by establishing the amounts and _____ of the normal and supplemental costs pertaining to the benefits (or benefits and expenses) of the plan.

Answer 15

actuarial cost

incidence

Question 16

Although no longer permitted by law…

• Under the _______ funding approach, the employer pays each retired worker’s monthly pension as each payment comes due. Since these monthly pension outlays are provided out of current operating income, there is no _______ of pension funds in an irrevocable trust or through a contract with an insurance company.
• Under the ______ funding approach, the employer sets aside for each employee, on the date the latter retires, a ______ amount sufficient to provide the monthly pension benefit promised under the plan. The lump-sum amount needed to provide the promised benefit is a function of the amount of benefit assumptions as to the expected benefit period and the rate of investment return expected to be earned on the investment of this principal sum. No contributions are made on behalf of the employees who are _______.

Answer 16

current disbursement

accumulation

terminal

lump-sum

still actively at work.

Question 17

Under the advance funding approach for budgeting pension costs, funds are set aside on a systematic basis prior to the employee’s retirement date. Thus, periodic contributions to the plan are made on behalf of the group of active employees during their _______.

However, this does not mean that each dollar of contributions is necessarily _______ for specific employees. Contributions are not allocated to specific employees under certain funding instruments. Plans operating under this approach invariably are qualified with the ____.

Answer 17

working years

earmarked

IRS

Question 18

The accumulation of assets in a pension fund resulting from the advance funding of benefits serves as a ______ during periods of financial stress. During a period of low earnings or operating losses, an employer may find it advisable to reduce or eliminate pension contributions for a year or an even longer period. This can be done in those cases where the pension fund is of ______ that a temporary reduction of contributions does not violate the minimum funding requirements imposed by ERISA and subsequently modified by PPA.

Answer 18

buffer

sufficient size

Question 19

With passage of PPA, the concept of target normal cost was developed. Target normal cost is the _______ of benefits expected to accrue during the plan year, determined using the same assumptions as for determining the funding target.

Importantly, the target normal cost includes increases in because of expected increases in _______ during the year. However, an additional amount called the ______ also must be added to target normal cost to ensure that the plan is able to meet its obligations to participants and beneficiaries if the plan were to terminate. This requirement was instituted by ____.

Answer 19

present value

compensation

shortfall contribution

PPA

Question 20

The funding shortfall is the excess, if any, of the funding target over the value of the _______ (less any credit balance) as of the valuation date.

Answer 20

plan assets

Question 21

The minimum required funding for any plan year under the approach required by PPA is the sum of

1. The plan’s _______ for the plan year and
2. The shortfall contribution necessary to amortize the difference between assets and 100% of liabilities over a ____-year period of time. A shortfall contribution is required in the current year and in each of the next ___ years unless the plan becomes ______ at an earlier date.

Answer 21

• target normal cost
• seven
• six
• 100% funded

Question 22

An “at-risk” plan is one that has a funding target attainment percentage (FTAP) that is below ____ for the preceding year, and has an FTAP determined using special at-risk assumptions that is below ___ for the preceding year. There are special funding rules for at-risk plans and other restrictions that ______ payment of shutdown benefits, lump-sum distributions and plan amendments.

Answer 22

• 80%
• 70%
• curtail

Question 23

Under the funding rules instituted by PPA, a funding target is established.

The funding target is the ______ of a plan’s accrued benefits similar to the current liability determined using prescribed assumptions.

The funding target is used for many purposes, such as for determining funding amounts, benefit restrictions and _____ premiums.

The funding target requires contributions for a plan year if the sum of the plan’s target normal cost for the year and ____% of the plan’s _____ on the valuation date exceeds the value of the plan’s assets.

Answer 23

present value

PBGC

100%

liability

Question 24

Under PPA, three different interest rates apply for calculating the value of differing categories of benefits, based on how far into the future the benefits are expected to be paid.

• The first-segment rate is used to value benefits expected to be paid within ____ years from the beginning of the plan year;
• the second-segment rate is used to value benefits to be paid between five and ____ years from the beginning of the plan year;
• third-segment rate is used to value benefits to be paid after more than _____ years from the beginning of the plan year.

The ________ is the sole source for segment rates and the underlying yield curves.

Answer 24

five

20

20

Treasury Department

Question 25

Following the financial crisis of 2008, the Federal Reserve embarked on a series of policy efforts in which interest rates were maintained at extremely low levels relative to historical norms for a long time. To alleviate the necessity for plan sponsors to make extremely large contributions, relief was sought in terms of a modification to interest rates used for pension contribution calculations. The modification in these interest rates occurred with the passage of _____, which changed the segment interest rates used to determine the minimum ________ for single employer plans. It should be noted that these rates are not utilized for all plan purposes; that is, ______ segment rates must still be used for certain purposes.

Answer 25

MAP-21

funding requirements

unadjusted

Question 26

In general, it is first required that, if such an emplyer contribution is to be deductible, it must otherwise satisfy the conditions of an ordinary and necessary business expense under Code Sections ____ (relating to trade or business expenses) or ____ (relating to expenses for the production of income).

Also, a deduction will not be allowed for any portion of the contribution for any employee which, together with other deductions allowed for compensation for such employee, exceeds a __________ for services the employee actually has rendered.

Answer 26

162

212

reasonable allowance

Question 27

Under PPA, starting in 2008, the maximum amount that employers can deduct when making contributions to their defined benefit pension plans generally is equal to the greater of

1. The sum of the plan’s ______, the plan’s _______, and a ______ amount, minus the plan’s unreduced assets for the plan year; or
2. The ________ contribution for the year. The cushion amount generally equals the sum of 50% of the plan’s ______ for the plan year and the amount by which the funding target would increase based on future compensation increases.

Answer 27

• funding target
• target normal cost
• cushion
• minimum required
• funding target

Question 28

An _______ will be imposed on an underpayment of taxes that results from an overstatement of pension liabilities.

Answer 28

excise tax

Question 29

Established by _____, PBGC is a federal government agency that provides a ________ insurance program for the majority of defined benefit pension plans to ensure that pensioner benefit rights are protected up to a maximum amount per month in the event of _______ by the plan sponsor.

Answer 29

• ERISA
• plan termination
• bankruptcy