Sheet Metal Workers' National Pension Fund Actuarial Valuation and Review as of January 1, 2015 This report has been prepared at the request of the Board of Trustees to assist in administering the Fund and meeting filing requirements of federal government agencies. This valuation report may not otherwise be copied or reproduced in any form without the consent of the Board of Trustees and may only be provided to other parties in its entirety. The measurements shown in this actuarial valuation may not be applicable for other purposes. Copyright © 2015 by The Segal Group, Inc. All rights reserved. 101 North Wacker Drive, Suite 500 Chicago, IL 60606 T 312.984.8500 www.segalco.com October 2, 2015 Board of Trustees Sheet Metal Workers' National Pension Fund Fairfax, Virginia Dear Trustees: We are pleased to submit the Actuarial Valuation and Review as of January 1, 2015. It establishes the funding requirements for the current year and analyzes the preceding year’s experience. It also summarizes the actuarial data and includes the actuarial information that is required to be filed with Form 5500 to federal government agencies. The census information upon which our calculations were based was prepared by the Fund Office, under the direction of Ms. Debbie Elkins. That assistance is gratefully acknowledged. The actuarial calculations were completed under the supervision of Daniel V. Ciner, MAAA, Enrolled Actuary. We look forward to reviewing this report with you at your next meeting and to answering any questions you may have. Sincerely, Segal Consulting, a Member of the Segal Group By: Lall Bachan, ASA, MAAA, EA Richard G. Gerasta Daniel V. Ciner, MAAA, EA Senior Vice President and Actuary Senior Vice President Senior Vice President and Actuary Benefits, Compensation and HR Consulting. Member of The Segal Group. Offices throughout the United States and Canada TABLE OF CONTENTS Sheet Metal Workers' National Pension Fund Actuarial Valuation and Review as of January 1, 2015 Section 1: Actuarial Valuation Summary Introduction .................................................................................................................................................................. 5 Important Information about Actuarial Valuations ........................................................................................................ 6 A. Developments Since Last Valuation ..................................................................................................................... 9 B. Funded Percentage and Funding Standard Account ......................................................................................... 11 C. Solvency Projections .......................................................................................................................................... 12 D. Withdrawal Liability ............................................................................................................................................. 13 Summary of Key Valuation Results ........................................................................................................................... 14 Comparison of Funded Percentages ......................................................................................................................... 15 Section 2: Actuarial Valuation Results Participant Information ............................................................................................................................................... 16 Financial Information ................................................................................................................................................. 24 Actuarial Experience .................................................................................................................................................. 27 Actuarial Assumptions ............................................................................................................................................... 31 Plan Provisions .......................................................................................................................................................... 31 Funding Standard Account ........................................................................................................................................ 32 Pension Protection Act of 2006 ................................................................................................................................. 34 Solvency Projection ................................................................................................................................................... 36 Withdrawal Liability Overview .................................................................................................................................... 37 Disclosure Requirements .......................................................................................................................................... 38 Section 3: Supplementary Information Exhibit A - Table of Plan Coverage ........................................................................................................................... 39 Exhibit B - Participant Population .............................................................................................................................. 41 3 Exhibit C - Employment History ................................................................................................................................. 42 Exhibit D - Comparison of Active Participants by Local ............................................................................................. 43 Exhibit E - Summary Statement of Income and Expenses on an Actuarial Basis ..................................................... 46 Exhibit F - Financial Information Table ...................................................................................................................... 47 Exhibit G - Investment Return – Actuarial Value vs. Market Value ........................................................................... 48 Exhibit H - Annual Funding Notice for Plan Year Beginning January 1, 2015 and Ending December 31, 2015 ....... 49 Exhibit I - Funding Standard Account ........................................................................................................................ 50 Exhibit J - Maximum Deductible Contribution ............................................................................................................ 52 Exhibit K - Pension Protection Act of 2006 ................................................................................................................ 53 Exhibit L - Section 415 Limitations ............................................................................................................................ 55 Section 4: Certificate of Actuarial Valuation Certificate of Actuarial Valuation ............................................................................................................................... 56 Exhibit 1 - Summary of Actuarial Valuation Results .................................................................................................. 57 Exhibit 2 - Information on Plan Status as of January 1, 2015 .................................................................................... 58 Exhibit 3 - Schedule of Active Participant Data ......................................................................................................... 59 Exhibit 4 - Funding Standard Account ....................................................................................................................... 60 Exhibit 5 - Current Liability ......................................................................................................................................... 67 Exhibit 6 - Actuarial Present Value of Accumulated Plan Benefits ............................................................................ 68 Exhibit 7 - Statement of Actuarial Assumptions/Methods .......................................................................................... 69 Exhibit 8 - Summary of Plan Provisions .................................................................................................................... 75 4 SECTION 1: ACTUARIAL VALUATION SUMMARY Introduction There are several ways of evaluating funding adequacy for a pension plan. In monitoring the Plan’s financial position, the Trustees should keep in mind all of these concepts. Funding The ERISA Funding Standard Account measures the cumulative difference between actual contributions and the Standard minimum funding standard. If actual contributions exceed the minimum funding standard, the excess is called the credit Account balance. If actual contributions fall short of the minimum funding standard, a funding deficiency occurs. Zone The Pension Protection Act of 2006 (PPA’06) called on plan sponsors to actively monitor the projected Funding Information Standard Account credit balance, the funded percentage (the ratio of the actuarial value of assets to the present value of benefits earned to date) and cash flow sufficiency. Based on these measures, plans are then categorized as critical (Red Zone), endangered (Yellow Zone), or neither (Green Zone). The Multiemployer Pension Reform Act of 2014 (MPRA), among other things, made the zone provisions permanent. Solvency Pension plan funding anticipates that, over the long term, both contributions and investment earnings will be needed to Projections cover benefit payments and expenses. To the extent that contributions are less than benefit payments, investment earnings and fund assets will be needed to cover the shortfall. In some situations, a plan may be faced with insufficient assets to cover its current obligations and may need assistance from the Pension Benefit Guaranty Corporation (PBGC). MPRA provides options for some plans facing insolvency. Withdrawal ERISA provides for assessment of withdrawal liability to employers who withdraw from a multiemployer plan based on Liability unfunded vested benefit liabilities. A separate report is available. Section 1: Actuarial Valuation Summary as of January 1, 2015 for the Sheet Metal Workers' National 5 Pension Fund Important Information about Actuarial Valuations An actuarial valuation is a budgeting tool with respect to the financing of future uncertain obligations of a pension plan. As such, it will never forecast the precise future contribution requirements or the precise future stream of benefit payments. In any event, it is an estimated forecast — the actual cost of the plan will be determined by the benefits and expenses paid, not by the actuarial valuation. In order to prepare a valuation, Segal Consulting (“Segal”) relies on a number of input items. These include: Plan provisions define the rules that will be used to determine benefit payments, and those rules, or the interpretation of them, may change over time. Even where they appear precise, outside factors may change how they operate. For example, a plan Plan may require the award of a Social Security disability pension as a condition for receiving a disability pension from the plan. If so, Provisions changes in the Social Security law or administration may change the plan’s costs without any change in the terms of the plan itself. It is important for the Trustees to keep Segal informed with respect to plan provisions and administrative procedures, and to review the plan summary included in our report to confirm that Segal has correctly interpreted the plan of benefits. An actuarial valuation for a plan is based on data provided to the actuary by the plan. Segal does not audit such data for completeness or accuracy, other than reviewing it for obvious inconsistencies compared to prior data and other information that appears unreasonable. For most plans, it is not possible nor desirable to take a snapshot of the actual workforce on the Participant valuation date. It is not necessary to have perfect data for an actuarial valuation: the valuation is an estimated forecast, not a Information prediction. The uncertainties in other factors are such that even perfect data does not produce a “perfect” result. Notwithstanding the above, it is important for Segal to receive the best possible data and to be informed about any known incomplete or inaccurate data. Part of the cost of a plan will be paid from existing assets – the balance will need to come from future contributions and investment income. The valuation is based on the asset values as of the valuation date, typically reported by the auditor. Some plans include assets, such as private equity holdings, real estate, or hedge funds, that are not subject to valuation by reference Financial to transactions in the marketplace. A snapshot as of a single date may not be an appropriate value for determining a single Information year’s contribution requirement, especially in volatile markets. Plan sponsors often use an “actuarial value of assets” that differs from market value to gradually reflect year-to-year changes in the market value of assets in determining the contribution requirements. In preparing an actuarial valuation, Segal starts by developing a forecast of the benefits to be paid to existing plan participants for the rest of their lives and the lives of their beneficiaries. This requires actuarial assumptions as to the probability of death, disability, withdrawal, and retirement of participants in each year, as well as forecasts of the plan’s benefits for each of those events. The forecasted benefits are then discounted to a present value, typically based on an estimate of the rate of return that will be achieved on the plan’s assets. All of these factors are uncertain and unknowable. Thus, there will be a range of Actuarial reasonable assumptions, and the results may vary materially based on which assumptions the actuary selects within that range. Assumptions That is, there is no right answer (except with hindsight). It is important for any user of an actuarial valuation to understand and accept this constraint. The actuarial model may use approximations and estimates that will have an immaterial impact on our results and will have no impact on the actual cost of the plan (the total of benefits and expenses paid out over time). In addition, the actuarial assumptions may change over time, and while this can have a significant impact on the reported results, it does not mean that the previous assumptions or results were unreasonable or wrong. Section 1: Actuarial Valuation Summary as of January 1, 2015 for the Sheet Metal Workers' National 6 Pension Fund Given the above, the user of Segal’s actuarial valuation (or other actuarial calculations) needs to keep the following in mind:  The actuarial valuation is prepared for use by the Trustees. It includes information for compliance with federal filing requirements and for the plan’s auditor. Segal is not responsible for the use or misuse of its report, particularly by any other party.  An actuarial valuation is a measurement at a specific date — it is not a prediction of a plan’s future financial condition. Accordingly, Segal did not perform an analysis of the potential range of financial measurements, except where otherwise noted.  Actuarial results in this report are not rounded, but that does not imply precision.  Critical events for a plan include, but are not limited to, decisions about changes in benefits and contributions. The basis for such decisions needs to consider many factors such as the risk of changes in employment levels and investment losses, not just the current valuation results.  ERISA requires a plan’s enrolled actuary to provide a statement for inclusion in the plan’s annual report disclosing any event or trend that the actuary has not taken into account, if, to the best of the actuary’s knowledge, such an event or trend may require a material increase in plan costs or required contribution rates. If the Trustees are currently aware of any event that was not considered in this valuation and that may materially increase the cost of the Plan, they must advise Segal, so that we can evaluate it and take it into account.  A certification of “zone” status under PPA’06 is a separate document from the actuarial valuation.  Segal does not provide investment, legal, accounting, or tax advice. This valuation is based on Segal’s understanding of applicable guidance in these areas and of the plan’s provisions, but they may be subject to alternative interpretations. The Trustees should look to their other advisors for expertise in these areas.  While Segal maintains extensive quality assurance procedures, an actuarial valuation involves complex computer models and numerous inputs. In the event that an inaccuracy is discovered after presentation of Segal’s valuation, Segal may revise that valuation or make an appropriate adjustment in the next valuation.  Segal’s report shall be deemed to be final and accepted by the Trustees upon delivery and review. Trustees should notify Segal immediately of any questions or concerns about the final content. As Segal Consulting has no discretionary authority with respect to the management or assets of the Plan, it is not a fiduciary in its capacity as actuaries and consultants with respect to the Plan. Section 1: Actuarial Valuation Summary as of January 1, 2015 for the Sheet Metal Workers' National 7 Pension Fund ACTUARIAL VALUATION OVERVIEW Participant Plan Financial Information Provisions Information Experience Actuarial Assumptions Actuarial Modeling Zone Funding Disclosures Withdrawal Solvency Information Standard Account Liability Projections Section 1: Actuarial Valuation Summary as of January 1, 2015 for the Sheet Metal Workers' National 8 Pension Fund This January 1, 2015 actuarial valuation report is based on draft financial and demographic information as of that date. Changes subsequent to that date are not reflected unless specifically identified, and could affect future results. Segal is prepared to work with the Trustees to analyze the effects of any subsequent developments. The current year’s actuarial valuation results follow. A. Developments Since Last Valuation 1. On December 16, 2014, the Multiemployer Pension Reform Act of 2014 (MPRA) was enacted. MPRA expanded and clarified various zone status rules, made changes to withdrawal liability rules for plans in the red or yellow zones, enabled suspension of benefits for deeply troubled plans, and granted PBGC flexibility in facilitating plan mergers and approving partitions. 2. Based on past experience and future expectations, the following assumptions were changed for this year’s valuation:  Mortality assumption for non-retired participants was changed to the RP-2014 Blue Collar Employee Mortality Tables (sex distinct), with ages set forward 1 year, projected generationally using Scale MP-2014;  Mortality assumption for beneficiaries and non-disabled pensioners was changed to the RP-2014 Blue Collar Healthy Annuitant Mortality Tables (sex distinct), with ages set forward 1 year, projected generationally using Scale MP-2014;  Mortality assumption for disabled pensioners was changed to the RP-2014 Disabled Retiree Mortality Tables (sex distinct), with ages set forward 1 year, projected generationally using Scale MP-2014; and  Annual administrative expense assumption was changed to $14,100,000, payable monthly. 3. The rate of return on the market value of plan assets was 6.1% for the 2014 Plan Year. The rate of return on the actuarial value of assets was 6.4% as a result of the asset valuation method. As of January 1, 2015, the actuarial value of assets of $4.14 billion represents 103.5% of the market value of assets of $4.00 billion. The current assumed long-term rate of return on investments is 7.50%. Given the low fixed income interest rate environment, target asset allocation and expectations of future investment returns for various asset classes, we will continue to monitor the Plan’s actual and anticipated investment returns. 4. Based on the 3-year average market value investment return of 10.27% for the Plan Years ended December 31, 2011-2013, the Applicable Percentage under the Variable Benefit Accrual Rate (VBAR) formula is 1.25% for the 2015 Plan Year. Based on the 3-year average market value investment return of 12.89% for the Plan Years ended December 31, 2012-2014, the Applicable Percentage under the VBAR formula is 1.25% for the 2016 Plan Year. Details of the VBAR formula are provided in Section 4, Exhibit 8. Section 1: Actuarial Valuation Summary as of January 1, 2015 for the Sheet Metal Workers' National 9 Pension Fund 5. Contribution rates increase in accordance with the Alternative Options of the Funding Improvement Plan. Since benefit accruals are tied to contribution rates, increases in contribution rates are recognized as plan amendments. The average contribution rate increased from $4.35 per hour as of January 1, 2014 to $4.64 per hour as of January 1, 2015. 6. Based on the census data used for this valuation (as of December 31, 2014), 75.7% of active participants were covered under the First Alternative Option (38.0% covered under 55/30 contracts), 23.7% were covered under the Default Option, 0.4% were covered under the benefit structure applicable to groups that did not continue bargaining increases under the Alternative Options and 0.2% were covered under the Second Alternative Option (none covered under 60/30 contracts). 7. The 2015 certification, previously issued on March 31, 2015, was based on the liabilities calculated in the 2014 actuarial valuation, projected to December 31, 2014, and estimated asset information as of December 31, 2014. The Plan was classified as endangered (Yellow Zone) status because the Plan was not critical (Red Zone) status and the projected funded percentage was less than 80%. In addition, the Plan was not projected to be in critical status for any of the succeeding five Plan Years. This projection was based on the Trustees’ industry activity assumption that the active population will remain level at 54,282 active participants and, on average, contributions will be made for 1,650 hours per year for each active participant. Section 1: Actuarial Valuation Summary as of January 1, 2015 for the Sheet Metal Workers' National 10 Pension Fund