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Milliman Sustainable Income Plan
Retirement plans meet the social need of securing income for people in old age. America’s labor unions have a longstanding commitment to provide a reliable standard of living for members who are working—and those in retirement. This commitment is essential to attract new union workers and keep union employers competitive in the marketplace.
Financial market risk. In recent years, poor investment returns have resulted in plan underfunding. Correcting underfunding often requires substantial increases in employer contributions, particularly in mature plans with a high percentage of retirees.
Employers in the program have to undergo difficult renegotiations of collective bargaining agreements to secure increased funding. These increased costs can threaten the health of employers’ businesses. Contribution increases may also ultimately come out of participants’ pockets in the form of pay freezes for current workers and the inability to provide cost of living adjustments for retirees. In the worst cases, benefit suspensions may be required.
Trustees of multiemployer plans have had ample opportunity to learn from the experience of their counterparts in the corporate pension world. The overwhelming shift to defined contribution (DC) plans was a response to contribution and funded status volatility that had threatened the viability of many corporate sponsors.
However, as the first generation of DC-only participants begins to retire, it’s clear that the majority have inadequate retirement savings. While DC plans solve the contribution and funded status volatility problems for employers, this leaves participants on the hook for all major retirement risks, including investment, interest rate, longevity, and inflation risks. The result is that many participants are vulnerable to poverty in old age.
Multiemployer plan trustees have maintained their commitment to keep participants covered by defined benefit (DB) plans. Yet the consequences of continued market volatility can’t be ignored. Many trustees are looking for a better plan design that stays fully funded in all markets, minimizes withdrawal liability, stabilizes employer contributions, and provides retirees with stable benefits.
The Milliman Sustainable Income Plan® (SIP) addresses all of those needs. It’s a variation on a plan design approved in 1953. In that basic design, benefits accrue as in a traditional DB plan. The benefits then move up and down based on the fund’s actual investment return. This keeps liabilities and assets in balance, and the plan maintains 100% funding in all market conditions. However, in that design, retiree benefits routinely move up and down.
The SIP addresses the benefit volatility problem. By providing slightly smaller benefit increases when returns are particularly good, the SIP builds a reserve that is used to prevent benefit declines when investment returns are poor. Regulations published in 2014 make the SIP possible.
The SIP stays funded in all market conditions and provides lifelong increasing benefits to retirees, all with stable, predictable contribution requirements.
The SIP truly provides the best of both worlds, combining the stability and predictability of the contributions found in a DC plan along with the secure lifelong benefits of a DB plan.
The chart shows how well plan designs compare on important features. Green squares are best. Gray squares are worst. You can see that defined contribution plans do well on funding considerations while defined benefit plans do well on benefits considerations.
The SIP meets both funding and benefit needs. It is a solution that can restore the ability of multiemployer plans to provide a retirement plan that fulfills its intended mission.
Comparing features of different retirement plans
How a prefunding strategy and rising interest rates enabled a nonprofit to reopen its pension
Learn how the Milliman Sustainable Income Plan can help retirement plans work better
See how the Milliman Sustainable Income Plan is revolutionizing retirement
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