Early Retirement Windows - Revisited

[LIBOR]

Our client is opening a 3 month early retirement window via plan amendment effective 1/1/2004; should the 1/1/2004 valuation reflect an assumed number of takers or should it reflect actual.

Also, if we go the assumed route is the change in liability an assumption or plan change ?

[david rigby]

The second question is answered by your first statement: "plan amendment".

There may be more than one way of recognizing the window in funding. I would probably include it in 1/1/04 valuation with best estimate of "takers". If actual takers differ, then that will show up in the Gain/Loss at 1/1/2005.

Be careful about SFAS 88.

[LIBOR]

thanks Pax ; my gut leaned towards reflecting the liability change as an amendment base but a colleague argued that it could also be viewed as an assumption change base. i.e. 30 year vs 10 year .

I was just wondering if it's the 'ole coin flip or is there a reason it needs to be an amendment base ?

[david rigby]

No coins involved. Assuming the window requires affirmative action in the form of a plan amendment, I have trouble understanding why it could be anything else.

[MGB]

The new assumptions specifically associated with the amendment should not be viewed as an assumption change. They are additional assumptions that didn't have any place in the valuation before. However, there usually are additional assumption changes that are made in conjunction with this situation that would create an assumption change after accounting for the amendment.

For example, this should trigger a discussion with the plan sponsor their future retention of the remaining employees and the resulting personnel policies. Quite often, the window may only be a perlude to continued pressure on the employees to leave (e.g., work conditions deteriorate, salaries are frozen, etc.). On the other hand, sometimes it is too successful and the remaining people get treated like kings to stay on because they can't afford to lose them (I've seen this many times). Either one of these scenarios ought to cause the actuary to change turnover, early retirement rates and salary scales.

Another scenario may be that the window really isn't needed to reduce the workforce, but is intended to weed out the "slackers," with full intentions to replace them with younger workers. I.e., those that haven't gotten raises and don't think they will in the future grab the window but those getting high raises stay on. This may indicate the need for adjusting salary scales for the continuing workers.

[LIBOR]

I was just reasoning that if I make an assumption that all eligible for the window will opt for it, i.e. a new assumption regarding the incidence of retirement, then it would give rise to an assumption base.

Granted, the reason for the window is to reduce costs and so the sponsor would also prefer a 30 year base but it was just an academic type query.

My question also draws on information from earlier posts on the topic - I believe Andy H had some very good questions in early 2001 on this very topic.

Don't know if he resolved his questions but would be interested in knowing his final approach and methodology ??

[david rigby]

Now you touch on appropriate consulting advice. Amortizing such a plan amendment over 30 years would be the IRC 412 minimum. That does not mean it is a good idea. I would advise a sponsor to make sure its actual contribution recognizes a more rapid amortization.