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Guest brown

Joint vs individual DB annuities -- actuarial adjustments

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Guest brown

I am looking for information about how DB benefits are typically adjusted to account for the choice between individual and joint benefits. The specific question: Take 2 males with identical work histories, earnings, pension plans, etc. The only difference is that one is married, one is not. Do most DB plans calculate the benefit difference between the two individuals so that the actuarial present value of benefits are the same? Or is there cross-subsidization, i.e., implicit transfers from singles to married couples?

I need this information for some academic research I am conducting.

Thanks for any help or references on this.

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Guest Ray Williams

Marital status does not affect benefit.Each would have the same benefit. Marital status would affect the periodic payments recieved if the married participant elected to recive payment under a joint & suvivor or some number of years certain method of payment.

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Guest brown

Thanks for the response. I need to clarify my question.

Assume both are married, but one chooses a joint and survivor benefit, and one chooses a straight life individual annuity.

Is the change in the benefit level always done on an actuarially fair basis? Or are there certain limitations on pension plan's ability to reduce benefits? (For example, suppose the person's spouse was very young -- say 25, and they chose joint and full survivor benefits. The straight actuarial adjustment would lower monthly benefit amount substantially. Is there ever a case in which the plan is prohibited from making the full adjustment?

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The DB plan could be designed to provide equal benefits to the married and unmarried, or it can be designed to provide larger benefits to the married.

Same benefit

Example: the normal form of benefit is a life annuity and all other benefits are defined as the actuarial equivalent (= of equal value using the actuarial factors defined in the plan)

In this case, both the married and unmarried are entitled to a monthly benefit of the same value. (If the participant is married, the plan must pay out the benefit in the form of a joint and survivor annuity unless both employee and spouse agree to waive the j&s benefit in favor of somthing else.)

The benefits, which are all actuarially equivalent, might be (made up numbers, but you'll see how it works):

life annuity $100 per month

50% j&s annuity $ 90 per month

Therefore, regardless of whether benefits are paid to married or unmarried participants or in the form of life annuities or j&s annuities, the value is the same.

Higher benefits for married

The plan could provide larger benefits to the marrried participants by subsidizing the j&s benefit. In this case, the 50% j&s annuity would be $100 per month, even though that is worth more than the $100 life annuity.

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The reduction to take a joint and survivor annuity could be set up as a "lower-than-actuarial" reduction, thus effectively subsidizing the joint and survivor annuity. For example, if the "correct actuarial reduction" was 10% based on the age of the employee and spouse, the plan could use a 7% reduction factor. All of this must be spelled out in the plan document.

There is no limit on how much the actuarial reduction can be with an old employee and a young spouse. For example, a 65 year old with a 21 year old spouse might have his benefit reduced by (let's say)70% to provide a joint and 100% survivor benefit.

However, if the plan wants to allow a non-spouse beneficiary (e.g., his daughter), he cannot name a non-spousae beneficiary such that the reduction would be greater than 50%. (The reason for this is that the pension plan must provide primarily retirement benefits for him. With such a young daughter, the pension plan would actually be providing primarily death benefits for him, not retirement benefits.)

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"Actuarial Equivalence" is a term which is defined uniquely for each plan. In some situation, it is defined as the result of using specific assumptions for the equivalence (e.g., 6% interest and the 83 group annuity mortality table) or perhaps establishing a table which might reduce the monthly benefit for those retiring before the normal retirement age by 1/4% per month.

Theoretically, the value of optional benefits can be determined on an arbitrary basis for each option within a plan. From a practical standpoint this is not the case - (a) because the federal government has imposed certain limits for many of the options if the plan is to remain "qualified" and (B) because it is too burdensome to have too many "equivalents" within one plan.

For some practical discussions of optional benefits and their derivation, consider a review of the PROCEEDINGS of the Conference of Consulting Actuaries. These are produced annually and include the papers and discussions presented at their annual meetings.

[This message has been edited by Larry M (edited 09-22-98).]

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