Jump to content

13th Check


Andy the Actuary
 Share

Recommended Posts

Other than paying taxes, I do not provide actuarial services in behalf of any government entity. Nevertheless, I'm curious how actuaries might approach the "13th check" that Detroit General Retirement System paid its retirees. As I understand (and please correct if off-base), liabilities were valued assuming say an 8% r.o.i. target. In years when investments outperformed the target, some portion of the "excess" earnings were distributed to retirees. Thus, because good year's investment performance was not there to offset bad year's investment performance, the investment target % could not be met. In short, there was a failure to understand or pay attention to what long-term rate of return meant.

Clearly, what was done in practice would be acceptable if the excess earnings were determined by comparing plan assets with the liabilities evaluated at a conservatively lower target rate, such as 3% and then distributing part of the excess, if any.

Has anyone out there seen this approach used or in addition to Detroit, does the rest of the world not behave so rationally either?

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

Link to comment
Share on other sites

I have gotten the impression over the years that 13th checks were fairly common in government plan and unheard of any place else for the reasons you outline.

A simple google found there other examples

http://www.in.gov/inprs/perfcolaand13thchecks.htm

http://calpensions.com/2013/08/05/can-san-jose-cut-pensions-of-current-workers/

http://www.michigan.gov/documents/MPSERS4_92713_7.pdf (see page 9)

http://www.publicpensioninstitute.org/public/8768.cfm%C2'>

Link to comment
Share on other sites

Thank you. The question was more than it was being done elsewhere but what was the approach to determining the 13th check?

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

Link to comment
Share on other sites

Andy, 13th checks, in my experience, are most often granted by the legislature, city council, or other governing body without regard to an "excess earnings" calculation. For example, if a plan has no automatic COLA, a 13th check may be granted from time to time. (Think of this as an alternative to granting an ad hoc COLA.) When granted, the governing body is aware that they are creating an additional liability, but they believe the plan is strong enough to justify this move. The amount of the 13th check is usually equal to one monthly payment, but it could be determined using some other approach, reflecting service, years retired, or other variables.

The "excess earnings" approach is used in some plans to determine the COLA as opposed to a 13th check. I've seen a survey saying there are 5 statewide retirement systems using this approach. These can be more sophisticated, involving cumulative earnings in excess of some amount over the assumed return, rather than just looking at the excess over the assumed return. I think "excess earnings COLAs" are all flawed, and I always tried to discourage their use.

The upshot is that the two things--"excess earnings concept" and 13th checks--are logically independent although they were both used in Detroit. There are plans that use the excess earnings approach to determine a COLA, but that don't grant a 13th check; and there are plans that grant 13th checks without considering the earnings.

Link to comment
Share on other sites

Thank you all for taking the time to educate an old guy beyond the textbooks.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...