The German Pension System in Brief
Germany has built its retirement system on three pillars: Social Security, occupational pensions and individual retirement investments. In this article, we focus on the first two pillars; the third pillar is still relatively small in Germany. |
Valuing Stock Options: Is It Time to Reconsider Binomial Lattice Models?
Valuation models were the subject of intense debate during the drafting of “Statement of Financial Accounting Standards (SFAS) No. 123(R) — Share-Based Payment.” The exposure draft would have required companies to use a binomial lattice model (or something similar) to value employee stock option awards, but the final standard has allowed companies to use either a binomial lattice or a closed-form model, such as Black-Scholes, without preference. The Future of DB Plan Funding Under PPA and Relief Legislation and Proposals
The overlay of the dramatic decline in asset values of the last few months on the incipient tougher funding requirements of the Pension Protection Act of 2006 (PPA) has prompted widespread concern about the magnitude of the required contributions to single-employer defined benefit (DB) plans in 2009 and 2010. In this analysis, Watson Wyatt estimates contribution amounts using a comprehensive and realistic model of plan funding under four scenarios: PPA; provisions in the Worker, Retiree, and Employer Recovery Act of 2008 (H.R. 7327) (signed into law by President Bush on December 23); and two other major relief proposals, individually and in combination. Our calculations are based on market conditions as of Dec. 12, 2008 (see appendix for further details). Fiduciary Responsibility and ETIs: A Conflict?
The U.S. Department of Labor (DOL) recently issued Interpretive Bulletin 08-1, which warns plan fiduciaries against selecting investments to promote public policy preferences. The notice specifically addresses economically targeted investments (ETIs), which create economic benefits apart from their investment return. The bulletin replaces Interpretive Bulletin 94-1 and clarifies and formalizes the DOL’s position. Many Older Workers Unaware of Retirement Distribution Options
As workers approach retirement, they must make decisions that will affect their long-term financial futures. One of these is choosing the form of distribution from their defined benefit (DB) plan and defined contribution (DC) account. While there might be several distribution options, for many DB plan participants it comes down to a choice between a life annuity and a lump sum. But how many older workers know enough to make an informed decision? DOL Finalizes Fiduciary Safe Harbor for Selection of DC Plan Annuity Providers
The U.S. Department of Labor (DOL) has finalized regulations establishing a safe harbor for the selection of an annuity provider and purchase of annuity contracts for defined contribution (DC) plans. The final regulations simplify the safe harbor proposed in September 2007 and clarify that the safe harbor is an optional means of satisfying the fiduciary standards of the Employee Retirement Income Security Act (ERISA). The regulations took effect Dec. 8, 2008. IRS Proposes Regulations on Consequences of Failing to Defer for DB and DC Plans
The IRS has proposed regulations that would require plan sponsors to include more information in the participant notices explaining the consequences of failing to defer a distribution. The regulations also would extend from 90 days to 180 days the election period for waiving the Qualified Joint and Survivor Annuity (QJSA) and the period for distribution of notices addressing rollover eligibility and the tax treatment of distributions. The Magnitude of Pension Deficits Compared With Firm Value Likely to Increase by Year-End
Plan sponsors and others are concerned about the business risks posed by pension plans, particularly in today’s unpredictable market conditions. In this case, “risk” refers to a company’s exposure arising from pension deficits. At the end of 2007, the ratio of pension plan deficits to market capitalizations (current risk) for FORTUNE 1000 firms was small due to the rise in funding levels. IRS Releases Benefit Limits for 2009
The IRS has announced the annual cost-of-living and statutory adjustments of various dollar limits for employee benefit plans. House Prices, Financial Markets, Government Intervention and the U.S. Economic Outlook
When he made his urgent request on Sept. 19 to Congress for the federal government to buy distressed assets, Treasury Secretary Henry Paulson stated that “[t]he underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. … These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets and even about the financial condition of the institutions that own them.” Year-End Pension Accounting Declines Might Be Milder Than Expected
Unsurprisingly, the value of pension plan assets has dropped sharply so far this year, and under Financial Accounting Standard (FAS) 158, funded status for 2008 will decline for most pension plans. However, today’s higher discount rates will soften the drop considerably. Despite the dramatic drops in the stock market during early October, we project only a moderate decline in average funding status — from 96 percent in 2007 to 88 percent in 2008. Claims Denial Faces Stricter Review Because Sponsor Failed to Meet DOL Electronic Delivery Requirements
A ruling by the 9th U.S. Circuit Court of Appeals emphasizes the importance of compliance with the U.S. Department of Labor’s regulations on delivering plan documents electronically. In Gertjejansen v. Kemper Insurance Companies, Inc., the court applied a stricter standard of review to a claims denial because the employer’s delivery of the summary plan description (SPD) did not meet DOL requirements. Employers May Allow Qualified Reservist Distributions of Unused Amounts From Health FSAs
In Notice 2008-82, the IRS clarifies a new rule under which employers may allow reservists to cash out unused funds from their health flexible spending arrangements (FSAs) after being called to active military duty. The new rule is part of the Heroes Earnings Assistance and Relief Tax Act of 2008, which was enacted June 17. Ordinarily, distributions from health FSAs are allowed only to reimburse substantiated medical expenses, and the participant forfeits any funds remaining at the end of the plan year. Emergency Economic Stabilization Act Has Broad Reach
On Oct. 3, President Bush signed the Emergency Economic Stabilization Act (EESA) of 2008 into law. The act is aimed at stabilizing the nation’s turbulent financial and credit markets by authorizing the secretary of the Treasury to purchase troubled mortgages, mortgage-backed securities and other assets from financial institutions, including pension plans. Mental Health Parity Law Passes on Coattails Of Economic Stabilization Act
After more than a decade of discussion, Congress has finally enacted legislation to mandate full parity for mental health and substance abuse benefits. The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act became law on October 3 when President Bush signed the Emergency Economic Stabilization Act, a broad bill aimed at stabilizing U.S. financial markets.
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