Just PENSIONS

by Donald W. Parkyn

Purpose

The purpose of this article is to

1. explain the difference between a survivor continuance benefit and the election of an optional form of settlement providing survivor-type benefits and
2. to show:
   
   1. that the entire “cost” of an optional form of settlement should come from the benefit awarded to the nonmember spouse and
   2. that the survivor continuance benefit should be divided “in kind.”

The examples given in this discussion refer to the California Public Employees’ Retirement System (”CalPERS”) and the California State Teachers’ Retirement System (”CalSTRS”). The concepts are general in nature and apply to other plans as well. First, it is necessary to have an understanding of some basic concepts:

Actuarial Equivalence

The fact that a dollar bill is equivalent to four quarters, ten dimes or twenty nickels in an example of equivalence. Each alternative has the same value as the dollar bill. Based on assumptions regarding mortality and interest, an actuary can determine the expected cost to pay a retirement benefit of $X a month over a member’s lifetime. The actuary can determine alternative payment schemes (optional forms of settlement) that will have the same expected cost to the plan. What we have is a “push” or “actuarial equivalence” to the employer — the same expected cost regardless of whether the basic form of benefit or an alternative form of settlement is selected. In some cases, some alternative forms of settlement will have greater actuarial value than the normal form of payment. The plan may provide a subsidy, to encourage the selection of a particular optional form of settlement, or the member may select an optional form of settlement tha t has a greater value in a particular case. For example, the member may be in poor health causing the value of benefits paid in the normal form, over the member’s life, to have a lesser value. Some of this value can be saved by selecting an optional form of settlement involving a survivor.

Normal Form of Retirement

For most plans, public and private, the normal form for payment of retirement benefits is over the lifetime of the member (a “life-only annuity” or “unmodified allowance”).For some plans (mostly private), the normal form for payment may be for a term-certain followed by a lifetime benefit (”5 year certain and continuous” or “10 year certain and continuous”), where benefits are paid for a minimum of 5 or 10 years, independent of the member’s survival.In an ERISA plan, if the member is married at the time of retirement, an automatic election of a “joint and survivor annuity” is deemed to have been made unless waived by the nonmember spouse.

Survivor Continuance Benefit

For some plans (mostly public), an additional benefit is paid to a member’s surviving spouse if the marriage occurred prior to retirement and continued until the member’s death. This is the type of benefit discussed in In re Marriage of Carnall. (1989) 216 Cal.App.3d 1010, 265 Cal.Rpt. 271. In some plans this benefit may terminate if the surviving spouse remarries.

Surviving Spouse

The Retirement Equity Act of 1984 (”REA”) gives the family court the authority to create the fiction that a member’s former spouse is, for benefit purposes, a surviving spouse of the member. However, REA does not cover public plans. The court determined in Carnall, that it does not have authority to create the fiction that a former spouse is a surviving spouse in a non-ERISA (the Employee Retirement Security Act) plan that it does in an ERISA plan. Carnall does tell us that if the member in a non-ERISA plan dies with a spouse who qualifies for a survivor continuance benefit, a former spouse can share in the benefit payments made while the qualifying spouse survives. Note that these benefits will be payable over the lifetime of the qualifying spouse, not the lifetime of the former spouse.

Joint and Survivor Benefit

A joint and survivor benefit pays benefits under three conditions:

1. While the member is alive and the nonmember is alive
2. While the member is alive and the nonmember is dead
3. While the member is dead and the nonmember is alive

This basic three-condition format can be used to describe optional forms of settlement involving survivor benefits. For example, the tables below describe the forms of settlement under CalPERS. and STRS “U” represents the unmodified allowance and “R” represents the reduced allowance under the particular optional form of settlement. The least amount of reduction, the difference between U and R, is for option 5; the most reduction is for option 6.

CalPERS
OPTION	MEMBER ALIVE & NONMEMBER ALIVE	MEMBER ALIVE & NONMEMBER DEAD	MEMBER DEAD & NONMEMBER ALIVE
unmodified	U	U	none
2	R	U	R
2W	R	R	R
3	R	U	.50R
3W	R	R	.50R

CalPERS with 25% survivor continuance
OPTION	MEMBER ALIVE & NONMEMBER ALIVE	MEMBER ALIVE & NONMEMBER DEAD	MEMBER DEAD & NONMEMBER ALIVE
unmodified	U	U	.25U
2	.25U + .75R	U	.25U + .75R
2W	.25U + .75R	.25U + .75R	.25U + .75R
3	.25U + .75R	U	.375R
3W	.25U + .75R	.25U + .75R	.375R

For example, under CalPERS Option 2 a reduced amount is paid while both the member and nonmember are alive. Upon the death of the nonmember, the benefit to the member “pops-up” to the unmodified benefit. Upon the death of the member, the reduced benefit continues to the nonmember.CalPERS Option 2W is just like Option 2 except on the death of the nonmember the benefit to the member continues at the reduced level and does not “pop-up” to the unmodified allowance. Of course, the reduced benefit in Option 2 is smaller than the reduced benefit under Option-2W.

Combining an Optional Form of Settlement with the Survivor Continuance Benefit

CalPERS members have 25%, 50% or no survivor continuance benefit depending on the contact the member’s employer has with CalPERS. If a CalPERS member has a 25% survivor continuance benefit, 25% of the member’s unmodified allowance is not available for an optional form of settlement such as an Option-2W.

STRS
OPTION	ORDER IN AMOUNT OF REDUCTION	MEMBER ALIVE & NONMEMBER ALIVE	MEMBER ALIVE & NONMEMBER DEAD	MEMBER DEAD & NONMEMBER ALIVE
unmodified	none	U	none	none
2	5	R	R	R
3	2	R	R	.5R
4	4	R	.67R	.67R
5	1	R	.50R	.50R
6	6	R	R	U
7	3	R	U	.50R

Survivor continuance or optional form of settlement

In some public plans, if at retirement a member has a spouse who qualifies for the survivor continuance benefit the member must either accepts this benefit payout scheme or have the current spouse waive the survivor continuance benefit in order to allow the election of an optional form of settlement involving survivor benefits for the benefit of the former spouse.

All or part

Most public plans require that an optional form of settlement be elected with respect to all of a member’s service rather than on just the portion of service “owned” by the nonmember. Most public plans allow only one beneficiary. This presents a problem when there is both a current and a former spouse, each seeking to obtain survivor benefits.

CalPERS. Males are females

CalPERS determines the amount of an optional form of settlement based upon the assumption that all members are female and all nonmembers are male! Since females tend to live longer than males, the period during which the female is expected to be alive is longer than the period case where the male is expected to be alive. If the member is male, the period in which survivor benefits are expected to be paid is longer than if the member is female. Since for optional form of settlement purposes, CalPERS assumes all members are female, the average period over which survivor benefits are expected to be paid is shorter and hence the associated cost (benefit reduction) is less. The effect off this is that CalPERS does not reduce the unmodified allowance as much as it should under options 2, 2W, 3, and 3W if the member is male. In other words, CalPERS provides a subsidy for male member’s who retire and elect an option 2, 2W, 3, 3W or 4 form of settlement.

In marriage dissolutions CalPERS, provides a special, spousal-option 4, which converts a benefit payable over a member’s life to an actuarially equivalent benefit payable while both the member and nonmember are alive and while either the member or nonmember is alive. This is exactly the same benefit that would be produced if CalPERS were to allow an Option-2W, with the nonmember as beneficiary, on the unmodified allowance, payable over the member’s lifetime, that is awarded to nonmember.

Summary and Conclusions

Who should pay?
If the nonmember wishes to receive benefits under an optional form of settlement in order to continue receipt of benefits after the death of member, this election should be done without any reduction in the benefits payable to the member. The nonmember is merely electing to receive his/her interest in an alternative form.

Survivor continuance
Since the existence of the survivor continuance benefit is contingent upon the member being

1. Married before retirement and
2. Remaining married until death,

it is reasonable to divide this benefit in kind if and when it becomes payable. This is in accord with the findings in Carnall.