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CuseFan

Lump Sum and/or Early Retirement Window - Actuarial Equivalence

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Client is interested in a lump sum window - they did one a couple of years ago with limited success, but want to consider "sweetening the pot" to improve the take rate. 

Is there a way to enhance the lump sum value without also increasing the annuity benefit? My thought is no, because the QJSA must be as valuable as any other option except a lump sum determined using applicable mortality and interest. So I don't think I can just use better AE assumptions, like an artificially low interest rate, to drive up my lump sum, correct? 

Can I use different overall assumptions and/or calculation methodology just for the window period - as it is not considered part of the accrued benefit? For example, could I add 3 years to a person's assumed age and/or decrease the actuarial reduction for early commencement, and calculate the lump sum as the present value of the immediate annuity rather than the annuity deferred to NRA? I'm sure I can do the first part, but not sure about changing the lump sum calculation methodology.

The goal is to enhance the attractiveness of the immediate lump sum compared to the immediate or deferred annuity.

Thanks

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If the lump sum for those in the early retirement zone is otherwise determined only as the value of the deferred annuity beginning at NRA, then making the lump sum the larger of that standard amount and the value of the immediate annuity only for window participants, so as to include any early payment subsidies in their lump sum, has been done. This can also simplify their relative value disclosure. I think you could also change the lookback month for 417(e) interest rates just for window participants, choosing a month that is otherwise eligible to use but with lower rates than the month you use under your ongoing lump sum option, yielding larger lump sums for window participants.

That is, I think you could do these things to increase the window lump sum without increasing the life annuity options under the window. You could do lots more stuff to increase lump sums payable to window participants if you are also willing to increase the annuity amounts.

Of course your window eligible group has to be nondiscriminatory, and there are also 10,000 other gotchas out there but you likely know that already! Good luck,

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Please consider that the "take rate" may be related to many factors, and "sweetness of  the pot" is only one of them.  Best way to begin is to talk to a pension actuary who has experience with ER windows. 

There are may ways to tweak the plan design to improve success rate, and your actuary can help with that, likely with confirmation from the legal counsel.  Example1, there may be things outside the pension plan that can be modified without significant increase in cost.  (I've seen a few different examples of this, some of which may require the company to engage another expert, such as accountant or attorney for compliance analysis.)  Example2, the demographic characteristics of the target group may be different from the target group on the prior window, so it may not be valid to assume the prior take rate will be applicable this time.  Example3 (contact your actuary).

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