Comptrollers' Retirement Division Memoranda
2019-03: Update to SERS Survivor Option Actuarial Factors
Date: October 25, 2019
RETIREMENT SERVICES DIVISION MEMORANDUM 2019-03
October 25, 2019
TO ALL HEADS OF STATE AGENCIES
ATTENTION:
All Human Resources and Payroll Officers
SUBJECT:
Update to SERS Survivor Option Actuarial Factors
I. Introduction
As you know, members of the State Employees Retirement System (“SERS”) have a right to choose from among four benefit payment options (Options A, B, C, and D) at the time they retire. Three of these options (the “Survivor Options”) provide for possible payments to a contingent annuitant after the member’s death. Under the fourth option (the “Straight Life Annuity”), all payments stop at the end of the member’s life.
Under the Survivor Options, the amount of the monthly retirement income that the member will receive during his or her lifetime is less than it would be under the Straight Life Annuity. To establish the amount of the reduced benefit under each Survivor Option, SERS determines the benefit payable to each member under a Straight Life Annuity, then multiplies that amount by a “factor” that has been calculated by the SERS plan actuaries.
The purpose of this memorandum is to inform you that these factors (the “Option Factors”) will be changed, effective January 1, 2020.
It is important to note that, for some retirees, the new Option Factors will result in a higher monthly benefit than the retirees would receive on the basis of the Option Factors that are currently in use. For others, the benefit under the new Option Factors will be lower.
For this reason, you should advise employees in your agency who are at or near retirement about whether retiring before or after the effective date of the new Option Factors will produce the better result.
II. Background
A. Benefit Payment Options
Pursuant to plan provisions, all members of SERS must, at the time of retirement, elect one of four benefit payment “options.” As explained in the Summary Plan Description (the “SPD”) for each of the SERS plans, the four options are:
- Option D – Straight Life Annuity. This option provides the SERS retiree with the highest monthly benefit for the retiree’s lifetime. However, all payments stop upon the retiree’s death.
- Option A – 50% Spouse. This option first provides a reduced monthly benefit to the retiree for life. Then, 50% of that benefit will continue after the retiree’s death for the lifetime of the surviving spouse.
- Option B – 50% or 100% Survivor (Contingent Annuitant). This option arranges to continue payments after the retiree’s death to any one designated contingent annuitant. This contingent annuitant can be any one person, including the retiree’s spouse. The option provides a reduced monthly benefit to the retiree for life. Upon the retiree’s death, a percentage of that benefit, either 50% or 100%, whichever they chose at the time of retirement, will continue for the designated contingent annuitant’s lifetime.
- Option C – 10 Year or 20 Year Period Certain. This option provides a reduced monthly benefit to the retiree for their lifetime with payments guaranteed from their retirement date for 10 or 20 years (whichever they choose). If the retiree should die within 10 years (120 payments) or 20 years (240 payments) from their date of retirement, the remaining payments, in accordance with their selection, will be made to their designated contingent annuitant(s). This is the only option which allows the retiree to name more than one contingent annuitant, each of whom would share each remaining monthly payment equally.
Under Option D, the Straight Life Annuity, no payment is made after the retiree’s lifetime. This is the option under which retirees receive the full pension amount to which they are entitled under the applicable SERS formula.
On the other hand, Options A, B, and C all allow for the possibility that benefits may continue to be paid to a designated annuitant after the retiree’s death. For that reason, the amount of the monthly retirement income payable to the SERS retiree under any of these three options will be less than the amount which the retiree would receive under a Straight Life Annuity. In effect, the reduction in benefits is payment for the actuarial cost of the additional benefit to be paid after the member’s lifetime.
The amount of the benefit under each of the three Survivor Options is determined with the aid of various Option Factors, which have been calculated by the SERS plan actuaries. These Option Factors vary, depending on the option that has been selected, by the closest age of the retiree, and the closest age of the contingent annuitant. The retiree’s benefit is determined by calculating the amount he or she would receive under the applicable SERS formula (i.e., the member’s benefit under a Straight Life Annuity) and then multiplying that amount by the appropriate Option Factor.
B. The Option Factors Will Be Changed
The Option Factors that are currently in use were adopted in 2009. After review of the most recent experience study, the State Employees Retirement Commission (the “Retirement Commission”) adopted a new set of actuarial assumptions. In keeping with standard actuarial practice, and based on the recommendation of the SERS plan actuaries, the Retirement Commission also adopted a new set of Option Factors, incorporating the new actuarial assumptions. This decision was made during a meeting on August 15, 2019.
At that meeting, the Retirement Commission further decided that the new Option Factors will become effective January 1, 2020.
For individuals who elect to retire from SERS on November 1, 2019, or December 1, 2019, this means that the current Option Factors, rather than the new ones, will be used to calculate their monthly retirement benefit. The new Option Factors will apply only to those individuals who retire from SERS on or after January 1, 2020.
III. Update to SERS Option Factors
The new Option Factors incorporate three sets of changes:
- 1. Interest Rate
As noted, the Option Factors are used to reduce the amount which a SERS retiree will receive during his or her lifetime, in order to pay for an additional benefit to be paid to a contingent annuitant in the future. To determine the cost of that future benefit in today’s dollars, the SERS plan actuaries assume that current assets will appreciate in the time period before the benefit must be paid. The likely amount of that appreciation is expressed as an interest rate.
The new Option Factors incorporate a decrease in the interest rate, from 8.25% to 6.90%. This lower interest rate means that current assets will appreciate more slowly, and so that the cost of future benefits in today’s dollars will be greater. This increase in the cost of paying a benefit to contingent annuitants requires a larger reduction in the benefit paid to retirees.
- 2. Mortality Tables
The mortality projections underlying the Option Factors have been updated. Current Option Factors are based on the RP-2000 table, with projection, prepared by the Society of Actuaries. The new Option Factors are based on the most recent table, RP-2014 (White Collar), with projection to 2020.
The updated projections recognize improved mortality (i.e., longer lifespans) for SERS members. A longer lifespan for a retiree means a delay of the date on which benefits will begin to be paid to a contingent annuitant. That delay reduces the cost of the future benefit in today’s dollars, because it gives current assets more time in which to appreciate. As a result, the benefit paid to the retiree does not have to be reduced to as great an extent as it is under current projections, and this is so, even though the annuitant might also live longer than currently expected. The effect of the revised mortality projections has the effect of offsetting the reductions required by lower interest rates.
- 3. COLA
The plan actuaries assumed that the rate of future COLAs will decrease, from 2.70% to 2.25%. Smaller increases in benefits mean that smaller amounts will be payable to contingent annuitants, who will not begin to receive benefits for many years. Since the absolute amount of future benefits is expected to be lower, the discounted cost of the annuitants’ benefits in today’s dollars is also lower. For this reason, the projected decrease in COLA rates means that retirees can pay for annuitants’ benefits with a smaller reduction in their own benefits.
IV. Impact to Retirees
As noted, the new Option Factors are effective January 1, 2020. For most retirees, application of the new Option Factors will result in a slightly smaller reduction of monthly retirement income than would be required under the current factors. (In other words, the monthly payment will be slightly higher.) But this will not be true for all retirees. You should advise SERS members who are at or near retirement age about how the new Option Factors will affect their benefits.
A set of illustrative charts providing comparisons of the old and new Option Factors under different scenarios is attached to this memorandum as Exhibit A. The complete set of old and new Option Factors are available on-line and can be accessed via the following links:
V. Conclusion
We encourage agencies to review the information contained in this memorandum, and to share it with any SERS members who submit applications to retire throughout the balance of the current calendar year. Questions or suggestions may be sent to the Retirement Services Division by email, at osc.rsd@ct.gov.
Very truly yours,
STATE EMPLOYEES RETIREMENT COMMISSION
KEVIN LEMBO, SECRETARY EX OFFICIO
By:
John Herrington, Director
Retirement Services Division
EXHIBIT A Sampling of Survivor Option Comparisons
|
RETIREMENT SERVICES DIVISION MEMORANDUM 2019-03
October 25, 2019
TO ALL HEADS OF STATE AGENCIES
| ATTENTION: | All Human Resources and Payroll Officers |
|---|---|
| SUBJECT: | Update to SERS Survivor Option Actuarial Factors |
I. Introduction
As you know, members of the State Employees Retirement System (“SERS”) have a right to choose from among four benefit payment options (Options A, B, C, and D) at the time they retire. Three of these options (the “Survivor Options”) provide for possible payments to a contingent annuitant after the member’s death. Under the fourth option (the “Straight Life Annuity”), all payments stop at the end of the member’s life.
Under the Survivor Options, the amount of the monthly retirement income that the member will receive during his or her lifetime is less than it would be under the Straight Life Annuity. To establish the amount of the reduced benefit under each Survivor Option, SERS determines the benefit payable to each member under a Straight Life Annuity, then multiplies that amount by a “factor” that has been calculated by the SERS plan actuaries.
The purpose of this memorandum is to inform you that these factors (the “Option Factors”) will be changed, effective January 1, 2020.
It is important to note that, for some retirees, the new Option Factors will result in a higher monthly benefit than the retirees would receive on the basis of the Option Factors that are currently in use. For others, the benefit under the new Option Factors will be lower.
For this reason, you should advise employees in your agency who are at or near retirement about whether retiring before or after the effective date of the new Option Factors will produce the better result.
II. Background
A. Benefit Payment Options
Pursuant to plan provisions, all members of SERS must, at the time of retirement, elect one of four benefit payment “options.” As explained in the Summary Plan Description (the “SPD”) for each of the SERS plans, the four options are:
- Option D – Straight Life Annuity. This option provides the SERS retiree with the highest monthly benefit for the retiree’s lifetime. However, all payments stop upon the retiree’s death.
- Option A – 50% Spouse. This option first provides a reduced monthly benefit to the retiree for life. Then, 50% of that benefit will continue after the retiree’s death for the lifetime of the surviving spouse.
- Option B – 50% or 100% Survivor (Contingent Annuitant). This option arranges to continue payments after the retiree’s death to any one designated contingent annuitant. This contingent annuitant can be any one person, including the retiree’s spouse. The option provides a reduced monthly benefit to the retiree for life. Upon the retiree’s death, a percentage of that benefit, either 50% or 100%, whichever they chose at the time of retirement, will continue for the designated contingent annuitant’s lifetime.
- Option C – 10 Year or 20 Year Period Certain. This option provides a reduced monthly benefit to the retiree for their lifetime with payments guaranteed from their retirement date for 10 or 20 years (whichever they choose). If the retiree should die within 10 years (120 payments) or 20 years (240 payments) from their date of retirement, the remaining payments, in accordance with their selection, will be made to their designated contingent annuitant(s). This is the only option which allows the retiree to name more than one contingent annuitant, each of whom would share each remaining monthly payment equally.
Under Option D, the Straight Life Annuity, no payment is made after the retiree’s lifetime. This is the option under which retirees receive the full pension amount to which they are entitled under the applicable SERS formula.
On the other hand, Options A, B, and C all allow for the possibility that benefits may continue to be paid to a designated annuitant after the retiree’s death. For that reason, the amount of the monthly retirement income payable to the SERS retiree under any of these three options will be less than the amount which the retiree would receive under a Straight Life Annuity. In effect, the reduction in benefits is payment for the actuarial cost of the additional benefit to be paid after the member’s lifetime.
The amount of the benefit under each of the three Survivor Options is determined with the aid of various Option Factors, which have been calculated by the SERS plan actuaries. These Option Factors vary, depending on the option that has been selected, by the closest age of the retiree, and the closest age of the contingent annuitant. The retiree’s benefit is determined by calculating the amount he or she would receive under the applicable SERS formula (i.e., the member’s benefit under a Straight Life Annuity) and then multiplying that amount by the appropriate Option Factor.
B. The Option Factors Will Be Changed
The Option Factors that are currently in use were adopted in 2009. After review of the most recent experience study, the State Employees Retirement Commission (the “Retirement Commission”) adopted a new set of actuarial assumptions. In keeping with standard actuarial practice, and based on the recommendation of the SERS plan actuaries, the Retirement Commission also adopted a new set of Option Factors, incorporating the new actuarial assumptions. This decision was made during a meeting on August 15, 2019.
At that meeting, the Retirement Commission further decided that the new Option Factors will become effective January 1, 2020.
For individuals who elect to retire from SERS on November 1, 2019, or December 1, 2019, this means that the current Option Factors, rather than the new ones, will be used to calculate their monthly retirement benefit. The new Option Factors will apply only to those individuals who retire from SERS on or after January 1, 2020.
III. Update to SERS Option Factors
The new Option Factors incorporate three sets of changes:
- 1. Interest Rate
As noted, the Option Factors are used to reduce the amount which a SERS retiree will receive during his or her lifetime, in order to pay for an additional benefit to be paid to a contingent annuitant in the future. To determine the cost of that future benefit in today’s dollars, the SERS plan actuaries assume that current assets will appreciate in the time period before the benefit must be paid. The likely amount of that appreciation is expressed as an interest rate.
The new Option Factors incorporate a decrease in the interest rate, from 8.25% to 6.90%. This lower interest rate means that current assets will appreciate more slowly, and so that the cost of future benefits in today’s dollars will be greater. This increase in the cost of paying a benefit to contingent annuitants requires a larger reduction in the benefit paid to retirees.
- 2. Mortality Tables
The mortality projections underlying the Option Factors have been updated. Current Option Factors are based on the RP-2000 table, with projection, prepared by the Society of Actuaries. The new Option Factors are based on the most recent table, RP-2014 (White Collar), with projection to 2020.
The updated projections recognize improved mortality (i.e., longer lifespans) for SERS members. A longer lifespan for a retiree means a delay of the date on which benefits will begin to be paid to a contingent annuitant. That delay reduces the cost of the future benefit in today’s dollars, because it gives current assets more time in which to appreciate. As a result, the benefit paid to the retiree does not have to be reduced to as great an extent as it is under current projections, and this is so, even though the annuitant might also live longer than currently expected. The effect of the revised mortality projections has the effect of offsetting the reductions required by lower interest rates.
- 3. COLA
The plan actuaries assumed that the rate of future COLAs will decrease, from 2.70% to 2.25%. Smaller increases in benefits mean that smaller amounts will be payable to contingent annuitants, who will not begin to receive benefits for many years. Since the absolute amount of future benefits is expected to be lower, the discounted cost of the annuitants’ benefits in today’s dollars is also lower. For this reason, the projected decrease in COLA rates means that retirees can pay for annuitants’ benefits with a smaller reduction in their own benefits.
IV. Impact to Retirees
As noted, the new Option Factors are effective January 1, 2020. For most retirees, application of the new Option Factors will result in a slightly smaller reduction of monthly retirement income than would be required under the current factors. (In other words, the monthly payment will be slightly higher.) But this will not be true for all retirees. You should advise SERS members who are at or near retirement age about how the new Option Factors will affect their benefits.
A set of illustrative charts providing comparisons of the old and new Option Factors under different scenarios is attached to this memorandum as Exhibit A. The complete set of old and new Option Factors are available on-line and can be accessed via the following links:
V. Conclusion
We encourage agencies to review the information contained in this memorandum, and to share it with any SERS members who submit applications to retire throughout the balance of the current calendar year. Questions or suggestions may be sent to the Retirement Services Division by email, at osc.rsd@ct.gov.
Very truly yours,
STATE EMPLOYEES RETIREMENT COMMISSION
KEVIN LEMBO, SECRETARY EX OFFICIO
By:
John Herrington, Director
Retirement Services Division
EXHIBIT A Sampling of Survivor Option Comparisons