Aggregate funding

[FAPInJax]

A client is using Aggregate funding and has no active participants - all retired and terminated.

Due to the recent market, the valuation produces a present value of future normal (assets less than pvfb).

The client would like the normal cost to be zero and their actuary is telling them to fund the entire difference as normal cost.

I do not believe either answer is correct. I thought there was a prohibition against using the aggregate funding method with no active employees. (My suggestion is to switch funding method to unit credit and deal with the amortization of the base. The client would obviously not like this because they want zero. TBSS - too bad so sad)

Can the aggregate method be used?? IF yes, what is the 'correct' answer for the normal cost??

Any comments are welcome.

[Blinky the 3-eyed Fish]

I agree that the aggregate funding method would not be reasonable without active employees and agree with your recommendation to switch to unit credit, provided it is available to do so under Rev Proc 2000-40. You may also look at switching the actuarial asset definition to one of the smoothing or averaging methods in that same promulgation, as that may end up getting you your zero.

[rcline46]

Only an immediate gain funding method with bases will produce a cost because you need to create a loss base to get a cost.

Ok, you can (now) always fund up to Current Liability regardless of funding method.

However, I don't see a requirement to create funding here. It may be wise, prudent, conservative but not required. Since the sponsor MUST sign off on change in funding method and they want no cost, I don't think you can force the issue.

[Blinky the 3-eyed Fish]

However, I don't see a requirement to create funding here.

I am not sure what this means.

The reason that a spread-gain method is not a reasonable funding method when there are no active participants is because there is no future working lifetime to spread the present value of future normal cost over. Thus, one could argue that the normal cost should be zero or the normal cost is the total amount of the PVFNC. However, either one is not reasonable, the former because you are dividing the PVFNC by zero, and any mathematician will scoff at that, the latter because each year the funding is the amount to shore up the unfunded amount and not spread over any period.

Since the sponsor MUST sign off on change in funding method and they want no cost, I don't think you can force the issue.

This is a nonissue since the work is designed to appease the client. Of course they will agree to the funding method change if it serves their objective.

[Guest merlin]

Frank, before jumping through any hoops to get the result requested by your client,think this through. Fast-forward a few years. The client now wants to terminate the plan, and there isn't enough money.Or an HCE wants to retire,and he can't get an unrestricted lump sum. You'll be the one wearing the bullseye. As for the client agreeing to any change in funding method, forget it as a defense. You're the professional. You're presumed to know better.

Sometimes we get so caught up in the twists and turns of the regulations, rulings,procedures, etc.that we forget our primary function: the execise of professional judgment. Just because we CAN do something doesn't mean we SHOULD do it. If you can't convince you client of this,let him go. Let him sue somebody else.

[Blinky the 3-eyed Fish]

I am not sure how many times I will need to say this. IT IS NOT A REASONABLE FUNDING METHOD. Assume that the client goes ahead and funds the PVFNC. When the IRS auditor disallows the deduction, who would be wearing the bullseye now?

Frank is indeed excercising professional judgment in questioning the actuary's flawed reasoning.

[Guest merlin]

I got the impression that Frank was criticizing the first actuary's method, but still wanted to satisfy the client if he could within the rules.My comments about judgment were meant to address the situation where this might be possible by using a reasonable funding method,or a smoothing method for asset valuation,or some other technically valid approach,and yet still be doing the wrong thing.

[david rigby]

I agree with Blinky's comment that it is not "reasonable" under the perspective of the IRS. See GrayBook Q&A's 1993-10, 1993-12, and 1999-6. In the latter, the IRS states that the

method must be changed to an immediate gain method.

[FAPInJax]

Thank you all for your comments. Especially the ones regarding the reasonableness of the funding method. The other recommendations regarding looking at the asset valuation method to not recognize or smooth the severe fluctuation are also very good!

Luckily I am not the actuary having to sign off.

This question was posed by a client and my reaction was that neither zero nor the present value of future normal cost was the correct result. BUT, I did not know whether there was a 'correct' answer - other than to change the funding method.

Another actuary had a similar situation and developed his own spread factor on the basis of the future working lifetime of the terminated participants less than retirement age. I did not feel comfortable 'creating' a basis although it makes as much sense as some.

Thank you all again for your interest and your comments.

[Guest pension222]

And let's not forget who the client is here.

The actuary is hired by the plan and must do the correct thing by the plan.

If the actuary knows there is a funding problem and allows the plan sponsor to convince him to adopt an approach that will exacerbate the problem, then he needs to be prepared to be sued by the participants of the plan.