Date of Birth Specific Actuarial Equiv Factors

[Guest pension222]

This is a first for me so I thought I would ask if anyone has ever seen this before and solicit comments.

The mortality factors used to determine optional benefit forms that are actuarially equivalent to the normal form vary depending on when the participant was born.

For DOB < 1940 use UP84,

For 1939 < DOB < 1950 use UP84 set back one year,

For 1949 < DOB < 1959 use UP84 set back two years, and

For 1959 < DOB, use UP84 set back three years.

It smells like an age discrimination issue to me.

I appreciate your feedback.

[AndyH]

Never seen that. Looks like each would need to be tested as BRFs under 401(a)(4).

[Guest pension222]

As I mentioned, I have never seen this either.

Does anyone else have an opinion?

Thanks.

[MGB]

I would not be so quick to label it either an age discrimination nor BRFs needing testing (although both issues, may, in fact be a problem).

Taking a step back a moment, let's first set the ground rule that the only mortality table that truly represents expectations is a fully-projected generational mortality table. In other words, a person age 65 tomorrow has a lower probability of death than a person age 65 today. That observance has not changed throughout history and is expected to continue in the future (of course, at what rate these mortality rates change over time is open to argument).

What you describe here is a simplified version of that with only a few steps instead of a step for every age.

Would the use of a fully-projected generational table create the same question? Or, because of various laws are we locked in to having the same conversion rates for everyone, with the only ability to recognize increased longevity being through an amendment to the plan's factors every few years? Off the cuff, I am not sure of the answer to this.

But, that needs to be answered before looking at situations like this one that are in-between one-size-fits-all factors (like most use) and a true mortality table.

[Guest pension222]

This was my first thought, that this was a simplified version of a generational table. The question has been well put though, is a table like this statutorily prohibited when applied to calculating equivalence between benefits, most specifically when calculating a lump sum?

For sure in this instance, participants born earlier in the century will receive a smaller lump sum at age 65 (all things other being equal) than those born later in the century.

[mwyatt]

A practical observation (at least concerning the lump sum issue):

Since your table is based on UP84, 417 minimum lump sums using the 94GAR table w/ current 30-year treasury rates (you don't specify your AE interest rate) would probably override anything calculated under your plan's AE rates.

[AndyH]

pension222, do you get the impression that this document was prepared by someone sophisticated, or the opposite? Interesting discussion, but perhaps we are overanalyzing this.

Forget the lump sum, what about optional forms of benefit, i.e. converting one form of benefit to another. How can they differ for different people without it raising discrimination testing issues?

[Guest pension222]

I have been using the lump sum option as an example but for sure one needs to consider the conversion of the life only normal form to 50% J&S and other optional forms.

I think this was drafted by someone who never considered the possibility that there may be a problem.