QDRO with some odd terms

[Gary]

A QDRO was submitted to a large company pension plan some time ago.

The pension was divided under the "separate interest" method as the participant's spouse commenced receipt of her pension prior to the participant retiring and receiving his pension.

The marital portion accrued benefit subject to division was an accrued benefit of $1,000, where 50% of such portion was allocated to the former spouse.

The spouse commenced the pension at age 62 and the terms of the plan provided for an early commencement factor (for alternate payees) of 0.8. If a plan participant retires at age 62 he receives 100% of his accrued benefit, but such subsidy was not provided to the alternate payee.

The plan does not allow the alternate payee to have a beneficiary, so the alternate payee is receiving her portion as a life annuity.

My expectation would have been that the alternate payee would have received a pension of:

= $1,000 * 0.5 (50% to alternate payee) * 0.8 (early commencemtn factor) = $400 per month

However, the plan further reduced the pension as follows:

= $400 * 0.95 = $380

The plan stated that the benefit was reduced 5% for a survivor annuity reduction factor.

I do not understand this reduction.

Anyone know of what I might be missing?

Thanks.

[Mike Preston]

Could it be the reduction to account for the fact that the recipient is younger than the participant? I wouldn't call that the "survivor annuity reduction factor", but I guess I can understand why someone might.

[QDROphile]

I subscribe to Mike Preston's speculation.

Another very remote possibility is that the actuaries think it is appropriate to take into account that a single life benefit has been divided into two lives, even though each portion is measured by a single life. The label is still wrong because the factor would not be the same as a joint life benefit (implied by the word "survivor"). Would the participant's portion be subject to a reduction, other than the 50%, because of the QDRO?

[Gary]

The Plan's calculation of the pension due to the alternate payee, specifically states that the alt. payee is to receive 50% of the accrued benefit while married.

The Plan/Company reduces the benefit for early commencement based on the age of the alt payee so that already accounts for the younger (or older) age of the alt payee.

The calculation multiplies the accrued benefit by 0.95 and calls it a survivor reduction prior to even applying the 50% (married portion) reduction.

As a separate interest pension I would think the alt payee in effect has ownership as a pseudo participant to 50% of the pension and I am not seeing the point of a spouse (or survivor) reduction.

Thanks.

[John Feldt ERPA CPC QPA]

However, the plan further reduced the pension as follows:

= $400 * 0.95 = $380

The plan stated that the benefit was reduced 5% for a survivor annuity reduction factor.

I have seen language something like "survivorship protection reduction factors" in large DB plans. The concept started when REA required DB plans to begin providing at least a minimum benefit to surviving spouse's of deceased participants. Back in those days (early 1980's), many DB plans provided only retirement benefits, not death benefits. If the participant died, then the plan paid nothing - they would argue that life insurance is what pays death benefits, not retirement plans. In this kind of plan design, the actuary discounted benefits at retirement by the expected disability, turnover, etc. and expected mortality, but did not add back a death benefit into the normal cost (since there was no death benefit payable).

When the law required minimum spousal benefits, plans like this wanted to keep their plan contribution costs the same, so the law allowed them to offset participants' accrued benefits by the small amount of death cost to cover this survivorship protection death benefit. In one of the plans I worked with, the accrued benefit was only reduced for the years in which the participant was over age 35 and was married. The plan had specific factors that applied to different age bands during which the participant was married.

Perhaps this might explain the 5% reduction, perhaps not.

[Gary]

That's a good theory.

I do remember in the 80's that plans on occassion gave the participant the opportunity to elect this REA coverage and that they would bear the cost by having their pensions reduced a little bit for the cost. As you say it would depend on how long the coverage had been in effect in order to determine the reduction.

In the case I am referring to, they seem to apply a straight fixed 5% reduction with no explanation and with the impression that it happens for all pensions. The calculation did not address that the participant ever elected such coverage.

Though you make an interesting and possibly valid point.

Thanks.