Pension Funding: A Program to Maximize Pension Growth and Limit Volatility

When a Pension is addressing its liabilities and assets, it is important that it fund for the future for its participants. The volatility of the markets since 2007 has increased demands on Pensions, as an uneasy balance of influences and the Pension Protection Act of 2006 (“PPA '06″) have required increasing funding levels to meet mandated levels. Additional breathing room has occurred with the passing of the Moving Ahead for Progress in the 21st Century Act (“MAP-21″). In order to reach the PPA '06 MAP-21 goals, the following example of a multidisciplinary, actuarially based, patented approach based upon actuarial statistics, patented and stochastic methods, and modeling (“the Program”) was developed. Contributions funding a securitized debt portfolio (“SDP”) that is not volatile, provide guarantees, and are not chasing alpha, while creating an asset for the Pension.

The Pension purchases a portfolio of unsecured debt that is securitized by permanent life insurance on the lives of the debtors. Employing this patented product effectively creates a secured debt from one that was previously unsecured. The net present value (“NPV”) of this SDP is then determined by discounting the future revenue flows of these underlying assets. The GASB, IASB and FASB accounting rules require that the NPV of the plan portfolio be fully recognized immediately upon purchase. Additionally, the annual maintenance fee outlays in future years are not required to be recorded until the year in which they occur. This creates a multiplier effect for the Pension. The reality, from a purely economic perspective, is that even absent the multiplier effect, an SDP acts to reduce volatility and creates guarantees of revenue enhancement for the Pension. Due to the economic and market factors relating to alternate investments through ownership of the SDP, the Pension receives the added benefit of meeting Financial Accounting Standards (“FAS”), Government Accounting Standards (“GAS”) and International Accounting Standards (“IAS”) and recognizing an immediate multiplier effect. The SDP will be 100% owned by the Pension and will provide the present value of the asset purchased at a discount together with a death benefit securitizing the debt instrument for the Pension over the life of the Pension. The trustee of the SDP will contract with the Pension trustees to provide insurance on the debt holder, and upon the death of the debtor, if the debt had not been satisfied to the SDP, the insurance carrier will provide payment covering the indebtedness. The arrangement is not intended to have a tax effect on the debtor, and the assets within the SDP are actuarially determined to assist in reaching the Pension's goals.