Spouse portion of DC plan balance based on 50% J&S annuity purchase

[Guest crosseyedtester]

Is there a standard way to estimate what portion of a participant's distributable balance in a defined contribution plan can be treated as the spouse's portion if that balance was used to purchase a 50% Joint & Survivor annuity payable at Normal Retirement Date?

Playing around with numbers, I come up with about 12-13% of the current balance.

[david rigby]

Not sure I understand the question. What numbers are you playing around with? How did you arrive at your estimate?

[Guest crosseyedtester]

Say a participant terminates at age 40 with a Profit Sharing account balance of $20,000 and a 50% J&S annuity will be purchased for him, payable at age 65. Is there a dollar value as part of the current balance that can be assigned to the spouse's portion of the annuity?

Not being certain what factors or assumptions to make, I am using the GAM83 GATT50/50 @7% (spouse is 37) to find an annuity factor deferred to age 65 and come up with 1.8782, or an annuity of $887.37. I also calculated on a Single Life basis to come up with $1,012.99. The difference is $125.61. Actually, I'm not sure what I would do here. Could I multiply that by 50% to get $62.81 and then using the Single Life factor of 1.6453 bring it back to current age to get $1,240.17? This would actually be 6.2% of the current balance.

So I'm wondering if the assumptions are acceptable and then if the methodology is acceptable.

Thank you for any thoughts.

[Blinky the 3-eyed Fish]

You need to determine its acceptability for what purpose?

As for your calculation, you realize you are comparing the difference of the reduced annuity in choosing a J&50%S over an SLA. In trying to find the spouse's "portion" you are computing a negative figure, and obviously that is not a correct determination.

If you answer the first question, maybe someone can devise some reasonable computation.

[Guest crosseyedtester]

The purpose is that a company sponsoring a money purchase pension plan did not include the 50% J&S option in their notice to terminated employees and would like to know what the exposure is if the spouse came along and asked for his/her portion since that option was not waived. They are not looking for a precise amount, just a range of that exposure.

[E as in ERISA]

I assume that 10 to 15 percent is a valid worst case scenario. E.g. for purposes of a merger where the target has not obtained necessary consents and you want to estimate liabilities for negotiation purposes. Or where someone is having a heart attack because someone just found out that they didn't get consent on a million dollar distribution and you want to assure them that their worst case scenario is significantly less so that you can settle them enough for a discussion.

For a specific situation, I'd find out both the participant's and spouse's ages. Then determine what interest rates and life expectancies you want to use.

[Guest crosseyedtester]

Still thinking about this, I have revised my methodology of determining a spouse's present value of a 50% J&S annuity. I just thought I'd throw it out...

Starting with the distribution amount, I have projected a deferred 50% J&S benefit using historical annuity rates as of month of distribution (from 1990 @ 8.00% -present at 4.00%) and UP84 table.

Then, using life expectancy at 65 assumptions of 17 (male), 20 (female), projected what year the spouse would begin to receive the survivor benefit. Using a single life annuity at spouse current age deferred to age spouse begins to receive payment, I projected back the survivor benefit to determine present value.

Dividing that amount by the total present value (distribution), I come up with a range of 1.5% for the oldest participant, to 38% for not the youngest, but a mid range participant with a higher interest rate from the early 90's.

Net result of the sum is 12-13% of total distribution amounts.

[Blinky the 3-eyed Fish]

Why are you considering historical annuity rates?

Where do you get the life expectancies from?

Are you factoring in mortality from the current age to 65?

Why not just get spousal consent from the woman and the exposure is $0? Also, my vague recollection in these cases is that the full 50% benefit must be provided if consent is not obtained and the spouse were to raise a stink. In other words, if the annuity was $887.37, you would have to provide an SLA of 1/2 that and the value of that annuity is your maximum exposure.

[E as in ERISA]

The starting date for the spouse's annuity is the participant's death (or expected death). That's much less than if it started at retirement.

[Guest crosseyedtester]

Life Expectancies are from a local state data book. Along with the historical annuity rates..I'm considering those because I just don't know any better. That's why I'm posting.

The client feels it will be difficult to go back in time and obtain all those spousal consents and would first like to know what the total exposure is before putting in the cost to get those consents.

The factor I'm using is a single life mortality factor starting at current spouse age, deferred to spouse age (80 if female) at expected employee death (83 if male). I'm dividing the survivor portion by the annuity to come up with present value.

Thank you for your input.

[Blinky the 3-eyed Fish]

The calculation is going to be to hard to explain I fear.

Rev Proc. 2003-44 Section 6.04 does say that the QJSA annuity that would have been payable upon the death of the participant is needed if no spousal consent can be obtained and the participant makes a claim. As Katherine pointed out, the participant would actually have to die.

So in your case with a deferred annuity to 65 it is valued as a series of probabilities:

PV of 65 annuity start = QJSA amount * prob husband dies before 65 * prob wife lives to 62 * SLA APR 62 /(1+i)^25

PV of 66 annuity start = QJSA amount * prob husband lives to 65 * prob husband dies during 65 to 66 * prob wife lives to 63 * SLA 63 /(1+i)^26

This continues until the end of the mortality table. You add up all the values. Have fun.

(I found an error.)

[david rigby]

There are probably some unanswered questions here. This plan administrator should hire a competent pension actuary, who will know the right questions to ask. As luck would have it, many of us are contributors to these Message Boards. Another source of information, no surprise, is our friendly neighborhood webmaster, who has created http://www.benefitslink.com/yellowpages/actuary.shtml