Wednesday, February 15, 2006

These plans are not substantially equivalent.

Dear Doug,

I am commenting on the issue of "substantial equivalence" between the
proposed and current plans. I believe that they are not substantially
equivalent.

Page 11 of LANS Total Compensation Design and Strategy, Revision 1
(hereafter "LANS Plan") states: "The survivor continuance feature will
be eliminated." I believe, based on calculations (see below), that
this elimination, with no compensating benefit, results in a plan that
has a significantly smaller net present value, and that the statements
in the last bullet on LANS Plan page 6 (that the plans are equivalent
to within a fraction of 1%) are incorrect and misleading.

The UC Retirement Plan Summary Description (July 2004), hereafter "UC
Plan", states (page 14): "Postretirement survivor continuance is not
optional, [and] is built into the retirement benefit (BASIC RETIREMENT
INCOME IS NOT REDUCED TO PAY FOR IT)" [emphasis added]. This is not
the same as the statement in LANS Plan (page 11), "The survivor
continuance...requires setting aside 25% of the basic retirement
income to be payable as a life annuity to eligible beneficiaries...."
In other words, a retiree who elects the Basic Option (UC Plan, page
12) now receives the survivor continuance in addition to the basic
retirement income. I believe that the LANS Plan summary misrepresents
the UC Plan benefit.

I have calculated, using U.S. Life Tables (2002, National Center for
Health Statistics, Tables 5 and 6) the present value ("PV") at the
time of retirement of the Basic Option for an employee who retires at
age 60 with 20 years service credit, and with HAPC = $10,000. I have
done the calculation with and without the 25% survivor continuance. I
assume a discount rate of 5% and average post-retirement COLAs of 2%.
(With other assumptions the results would be qualitatively similar.)

With survivor continuance Without survivor continuance % diff
------------------------- ---------------------------- ------

Case 1. Male employee, female spouse same age.
PV = $941,000 PV = $884,000 -6.1%

Case 2. Female employee, male spouse same age.
PV = $1,015,000 PV = $982,000 -3.3%

Case 3. Male employee, female spouse five years younger
PV = $959,000 PV = $884,000 -7.8%

The percentage differences would be the same for any assumed HAPC.
These are significant differences, much larger than claimed in the
LANS Plan (page 6). In Case 3, the employee loses nearly 8% of his
accrued pension benefit, equivalent to more than 1.5 years of service
credit. Unless I am misunderstanding the provisions of one or the
other plan, these plans are not substantially equivalent.

Sincerely,
William Press
LANL employee

Comments:
Direct from the UCRP web site:

When you die, your surviving spouse or surviving domestic partner is automatically paid 25% of your basic retirement income. This payment, called the postretirement survivor continuance, is built into your retirement benefit and can be paid only to your surviving spouse or surviving domestic partner, or if none, to your eligible children, or if none, to your eligible dependent parents.

In addition, you may provide a monthly lifetime benefit for your spouse or domestic partner, or another person (contingent annuitant). This benefit is separate from, and in addition to, the postretirement survivor continuance. To provide this benefit, you receive a reduced retirement income. The amount of the reduction depends on the payment option you choose and the average life expectancy of both you and your contingent annuitant.

If the 25% postretirement survivor continuance is set aside, the remaining 75% of your basic retirement income is adjusted for the contingent annuitant payment option selected. This adjusted portion is referred to as the option portion.

You will receive both the 25% survivor continuance and the option portion for as long as you live. The benefit paid to the contingent annuitant when you die is based on the option portion. If you name your spouse or domestic partner the contingent annuitant, he or she will receive both the postretirement survivor continuance and the contingent annuitant payment.

The contingent annuitant payment options are:

Option A Full continuance to contingent annuitant—When you die, your contingent annuitant receives a lifetime benefit equal to the option portion.
Option B Two-thirds continuance to contingent annuitant—When you die, the contingent annuitant receives a lifetime benefit equal to two-thirds of the option portion.
Option C One-half continuance to contingent annuitant—When you die, your contingent annuitant receives a lifetime benefit equal to one-half of the option portion.
Option D (for UCRP members with Social Security) one-half continuance to surviving spouse or domestic partner—This option is available only if the surviving spouse or surviving domestic partner is eligible for the postretirement survivor continuance and is named as contingent annuitant. With this option, the 25% survivor continuance is included in the calculation. When you die, your surviving spouse or surviving domestic partner receives one-half of your total monthly benefit for life.
 
UC website example:

Calculating Payment Option A
(Full Continuance)—
Spouse or domestic partner is contingent annuitant.

Basic retirement income is $2,000. The spouse or domestic partner is eligible for the 25 percent ($500)
postretirement survivor continuance; however, the member wants to provide the spouse or domestic partner with an additional monthly lifetime benefit.
The member names the spouse or domestic partner as contingent annuitant and chooses Option A.

Step 1:
The 25% ($500) survivor continuance is set aside.
$2,000 - $500 = $1,500 (the remaining 75%)

Step 2:
The reduction factor is applied to the remaining 75%.
.863 x $1,500 = $1,294 (option portion)

Step 3:
The 25% survivor continuance is added back.
$1,294 + $500 = $1,794 (member’s benefit)

The member’s retirement benefit is $1,794, to be paid every month for life. Thereafter, the spouse or domestic partner will receive both the $500 survivor continuance
and the option portion of $1,294, for a total monthly benefit of $1,794 (the same amount as the
member received).

Options B and C are calculated and paid in the same
way as Option A; only the reduction factors differ.
 
OK one more informational post from me.

I ran the UCRP Calculation for a 100K/yr. employee with a spouse. 31 years service, both age 60.

$6484/mo. 25% continuance=$1621

This is ~ what we lose per month per surviving spouse if the continuance is eliminated. We all better try to get this fixed in the 10 day comment period.
 
Here's a question for the NNSA. How does the UCRP compare to fed retirement and, more specifically, survivor benefit under the fed system.
 
From what I can tell from my mother-in-laws fed retirement (G-10 or 11).. UCRP promises a heck of a lot better than what the Fed stuff does. I say promise because I dont know how long it could be paid for.
 
Existing UCRP handouts at LANL clearly indicate the
reductions if one decide to take 100% or less spousal
continuance. It takes one page to show this. So,
how come I don't see any figures of benefit reductions
for LANS' 100%, 66%, or 50% spousal continuance on any
of their pension brief handouts? It could have been placed
on one frig'in page! Without this page, I have no way
to compare the plans for "equivalence". Seems to me
like LANS is doing a very poor job keeping us fully
informed about this new pension.
 
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