Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
Milliman provides administration and actuarial services to Company A’s fully-frozen Pension Plan A that is in the process of a standard plan termination. Company B sponsors Pension Plan B, an ongoing union pension plan with a flat-dollar times service formula.
During the plan termination process of Pension Plan A, Company A and Company B enter into a joint venture (JV), with Company A having a 61% controlling-interest in the JV. The JV includes 100% of the active participants in Pension Plans A and B. The JV creates DC Plan A, a defined contribution (DC) plan for non-union participants, which includes a 5% non-elective employer contribution. The JV wishes to assess retirement benefit alternatives for Company B union employees moving into the JV.
The effective date of employees transferring into the JV is December 2019. As the plan design is being assessed as that time, the JV begins to make 5% employer contributions into DC Plan A to JV employees including former Company B union employees. In July 2020, the JV resumes discussions to implement a new DB plan effective January 1, 2021, to cover former Company B union employees.
As the JV refocuses on implementing a DB plan, the client wishes to include two key factors into the design: 1) incorporate the 5% non-elective contributions already made into DC Plan A to former Company B union employees, and 2) do not retroactively credit pension service to December 2019. The JV considers the following design alternatives:
The client decided to create a Pension Plan E with a “double offset” arrangement, as the union agreed this design would meet the desired retirement benefits with respect to the collectively bargained agreement.