Is PPA Funding Just Plain Wrong?

[Andy the Actuary]

The Flower Magnate Luther Burbank Washington Grumps grew up as the youngest child of depression parents. He doesn't trust the stock market or for that matter Banks. He has purchased Poppy's, Inc. which has a somewhat mature population but underfunded DB plan for its 499 participants. LB (as his friends call him) wants to continue the Plan and will manage his workforce so the Plan never covers 500 participants because the word "at-risk" annoys him. He only wants to invest in the surest of financial instruments which he believes are money markets and treasuries and he doesn't care what the pundits profess, he "ain't changing his mind -- ever." He will contribute the minimum amount the law allows and doesn't care particiular what the Plan costs as he must protect his little flowers at all cost. The Plan assets long-term yield projections would fall short of the segment rates. In short, basing contributions upon the segments rates should push far too much funding into the future and will do anything but protect all those little poppies.

[david rigby]

Net effect, a built-in experience loss?

But wouldn't the 404 maximum (usually) permit the ER to make sufficient contribution to keep him 100% funded?

[K2retire]

I experienced a similar situation pre PPA in which the employer insisted on putting all of the contributions into a money market account earning 1-2% per year for his 6 person plan. The actuary would not permit us to use earnings assumptions that low and the client couldn't understand how his plan could be underfunded when he always deposited what we told him he needed to deposit.

In 2004 that seemed outrageous. In 2008 it's looking pretty smart!

[Andy the Actuary]

I experienced a similar situation pre PPA in which the employer insisted on putting all of the contributions into a money market account earning 1-2% per year for his 6 person plan. The actuary would not permit us to use earnings assumptions that low and the client couldn't understand how his plan could be underfunded when he always deposited what we told him he needed to deposit.

In 2004 that seemed outrageous. In 2008 it's looking pretty smart!

The earnings assumption is a matter of opinion. If the client had codified an investment policy that provided specifically for low yielding investments, then I'm not sure of the issue. There are, however, certain calculations (e.g., CL) including in the funding determination that were required to be made using government stipulated interest and mortality assumptions. Then, again, that's why with two actuaries, you get three opinions.

[Andy the Actuary]

Net effect, a built-in experience loss?

But wouldn't the 404 maximum (usually) permit the ER to make sufficient contribution to keep him 100% funded?

Sure, but you don't have to contribute at the maximum.

[tymesup]

LB is going to pay a ton of PBGC variable premium unless he sees the light. That will pay for a lot of fertilizer.