Advanced Search

Last Name First Name Company Name City Advanced Search

Actuary of the Future Education & Research Entrepreneurial Actuaries Financial Reporting Futurism Health International Investment Joint Risk Management Long-Term Care Insurance Management & Personal Marketing & Distribution Pension Product Development Reinsurance Smaller Insurance Company Taxation Technology

Research Projects

Research Projects in Pension

Reversion Taxes–Quantifying their Impact on Pension Plan Funding

1. Background

Prior to the 1980’s, if a pension plan terminated, the pension plan’s surplus assets reverted to the plan sponsor and were subject to regular corporate taxes. This process is commonly known as a “reversion” in the U.S. Throughout the 1980’s, many corporate acquisitions were financed by surplus assets gained through pension plan terminations and subsequent reversions. This trend was seen in both Canada and the U.S. Because of concern over the effect of terminations on pension plan participants, tax laws in the U.S. were modified to effectively eliminate, for most cases, this use of surplus pension assets. This was achieved by imposing an excise tax on the reversion assets. This excise tax was subsequently further increased and had the effect of reducing reversion assets to a tiny fraction of their before tax value.

Unsuccessful attempts have been made to reverse the increase in the U.S. excise tax. These attempts have been unpopular with the general public. However, the result of the existing situation is an asymmetric risk borne by the employer: Employers are responsible for funding shortfalls but have no direct access to surplus. However, there are some uses that certain surpluses can be applied toward such as paying for retiree health care costs.

To help solve current funding shortfalls, minimum funding requirements in the U.S. are moving more toward solvency funding targets. These more conservative funding targets increase a plan sponsor’s exposure to this asymmetric risk by making future surpluses more likely. A simple illustration of how this additional funding might shift the likelihood of surpluses and deficit projections in future years is shown below.

This potential shift in asymmetric risk has further confirmed the importance of an assessment of reversion taxes. In addition, feedback from a recent webcast on pension funding reform by the SOA corroborated that actuaries find this to be an important aspect of pension reform.

• Related issues for sponsors and other stakeholders include:
• Appropriate uses of surplus.
• Appropriate amount of surplus to be retained by an ongoing plan in the short and long term.
• Whether or not reversions should be mandatory on an ongoing basis.
• Appropriate amount of tax to adjust for delayed taxation (i.e., no “real” penalty)
• How significant is a confiscatory tax on an employer’s decision to maintain or create a plan.
• Implications in contributory plans.

II. Research Objective

The SOA’s Pension Section Research Team is seeking research proposals to quantify the impact of reversion taxes on pension funding. This is not intended to be a restatement of the current tax law or its general qualitative impact. Rather, the team is interested in evaluating the significance of reversion tax on funding by:

1. Developing a methodology for quantifying the asymmetric risk it places on plan sponsors. The researcher might wish to include as a variable the investment mix of the plan and consider whether there should be a risk-based measure of plan assets. Other possible variables include the credit rating of the plan sponsor, plan size, plan demographic mix, etc. What risk does any surplus withdrawal place on stakeholders (shareholders, participants, taxpayers/society, PBGC)?
2. Developing a methodology for quantifying how movement in minimum funding requirements toward solvency funding targets changes the significance of the reversion tax.
3. Determining a methodological framework for assessing how the presence or absence of a reversion tax and various associated surplus levels meets the long term interest of stakeholders (shareholders, participants, taxpayers/society and PBGC) for existing and new plans? What are the economic costs/benefits of surplus and reversion tax for each of the major stakeholders?
4. Examining whether plan sponsors should be forced to take asset reversions. Would automatic reversions counteract agency problems?

Researchers may propose on any or all of the above items. Given the range of the above items, it is anticipated that more than one proposal may be accepted in order to fully cover the subject of interest.

3. Proposal

To facilitate the evaluation of proposals, the following information should be submitted:

1. Resumes of the researcher(s), including any graduate student(s) expected to participate, indicating how their background, education, and experience bear on their qualifications to undertake the research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the researchers as well as for the firm or institution on whose behalf the proposal is submitted.
2. An outline of the approach to be used, emphasizing issues that require special consideration. Details should be given regarding the techniques to be used, colleteral material to be consulted, and possible limitations of the analysis.
3. Cost estimates for the research, including computer time, salaries, report preparation, research costs, etc. Such estimates can be in the form of hourly rates, but in such cases, time estimates should also be included. Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.
4. A schedule for completion of the research, identifying key dates or time frames for research completion and report submissions.
5. Ideas regarding the form and distribution of the final report, both for immediate release and for permanent reference (e.g., submission to North American Actuarial Journal or other refereed publication, SOA Monograph Series, CD ROM).
6. Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

4. Selection Process

The Pension Section Research Team is responsible for the selection of the proposal to be funded. Input from other knowledgeable individuals also may be sought, but the committee will make the final decision. The SOA's Research Actuary will provide staff actuarial support. A Project Oversight Group (POG) will be appointed to oversee the project upon selection of the proposal.

5. Questions

Any questions regarding this RFP should be directed to Steven Siegel, SOA Research Actuary.

6. Notification of Intention to Submit Proposal

If you intend to submit a proposal, please send written notification by February 15th, 2006 to Jeanne Nallon, SOA Research Assistant.

7. Submission of Proposal

Please e–mail a copy of the proposal to Steven Siegel .

Proposals must be received no later than February 28th, 2006. It is anticipated that all researchers who have submitted proposals will be informed of the status of their proposal no later than March 30th, 2006.

Note: Proposals are considered confidential and proprietary.

8. Conditions

The Society of Actuaries reserves the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available to proceed.

The Society of Actuaries also reserves the right to redirect the project as is deemed advisable. The Society of Actuaries intends to copyright and publish the results of this research. The research will be considered work-for-hire and all rights thereto belong to the Society of Actuaries. However, appropriate credit will be given to the researcher(s).

 

• If you intend to submit a proposal, please send written notification by February 15, 2006 to Jeanne Nallon, SOA Research Assistant.