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APPENDIX II
LISTING OF T'IRRITATION AND ;OF. ALIY

KATES AND AGE DISILIETICI
CSED II CAO CALCULATIONS

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TERMINATIOL FATES SCALE A SCAIL E

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PORTALITY YAITS ili iIS

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APPENDIX VI
STATE OF New YORK INSURANCE DEPARTMENT,

WELFARE FUND BUREAU,

New York, N.Y., June 30, 1971. ROBERT E. DUNNE. Assistant Counsel U.S. Senate Permanent Subcommittee on Investigations, Federal

Building, New York, N.Y.
DEAR MR. DUNNE: Enclosed herewith is a report on the interview with Louis
Ostrer held May 18, 1971, together with comments on the benefit plan of the
subject trust fund.
Please advise if we may be of further help in this matter.
Very truly yours,

LAWRENCE M. HYMAN,
Supervising Insurance Examiner.

GEORGE PERLA,
Senior Insurance Examiner.

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JUNE 25, 1971. SEVERANCE BENEFIT PLAN OF LOCAL 295 INTERNATIONAL BROTHERHOOD OF

TEAMSTERS On Tuesday, May 18, 1971, at 11:00 A.M. the following individuals met with Mr. Louis Ostrer at his offices at 377 Fifth Avenue, New York, N.Y.:

Robert E. Dunne, Assistant Counsel, United States Senate Committee on Government Operations, Permanent Subcommittee on Investigations, New York, N.Y.

Herbert L. Feay, Assistant Director and Actuary, U.S. General Accounting
Office, Washington, D.C.

Lawrence M. Hyman, Supervisory Examiner, Life Bureau, State of New
York Insurance Department, New York, N.Y.

George Perla, Senior Insurance Examiner Welfare, Plan Bureau, State of New York Insurance Department, New York, N.Y. The principal purpose of the meeting was to secure Mr. Ostrer's explanation of the operations of the Severance Benefit Plan of Local 295. This Plan was established for Members of Local 295 as a result of a Collective bargaining agreement between the union and the group of employers for the air freight ground transportation and handling for J. F. Kennedy airport in New York City.

During the course of the interview, Mr. Ostrer explained provisions and operations of the Plan. His explanations about the Plan are summarized in the next section of this Report. The second Section following this introductory statement contains comment on statements and remarks of Mr. Ostrer.

SUMMARY OF EXPLANATIONS OF MR. OSTRER

The Severance Benefit Plan of Local 295 has been submitted to the Internal Revenue Service for approval as a pension plan with an effective date of December 1, 1970. The benefits of this Severance Plan are assumed to supplement the pension benefits of the Local 295 Employer Group Pension Fund which was established in 1952 and which received tax exemption from the Internal Revenue Service.

The first employer payments to the Severance Plan were made in January 1971. This Plan is classified as a pension Plan in accordance with the requirements of IRS for previously approved severance benefits plans granting similar benefits. IRS approval of Local 295 Severance Benefit Plan as a pension plan for income tax purposes is expected.

Fring Programs, Inc., is the administrator for this Plan. The administrator will receive fees for administering the Plan. The amounts of and the frequency of the fees have not yet been determined and no fees have been paid to date. Income of the Plan

The employers included in the bargaining agreement must make payments to the Plan for each Union Member employed. The payments are determined as an amount per week for each Member. The payments for each Member are on the bases of $15 per week during the first Plan year, $30 per week during the second Plan year, and $40 per week for the third Plan year. Assuming approximately 1300 Union Members employed on the average for 50 weeks each per year, the

total income from the payments of the employers will be approximately one million dollars in the first year, two million dollars in the second year, and 2.6 million dollars in the third year.

The Plan will have income from that portion of the assets that is invested in interest-bearing securities. It is expected that the funds available for investment will be invested at an average rate of about 7 percent per year compounded annually. Two other sources of income will be:

(1) Forfeitures of accumulations by Members employed after the effective date of the Plan who terminate before completing five years of covered employment.

(2) Excess of the amounts of insurance collected from the insurance companies over the value of the death benefits paid to beneficiaries. Disbursements of the Plan

Practically half of the payments by employers will be used to provide insurance. The amount to be used for insurance is 49.98% of the payments on behalf of Members eligible for insurance. This percentage was selected to meet the requirements of IRŠ that less than half the payments be used to pay insurance premiums.

After receiving payments of death claims from the insurance company, the Plan will disburse death benefit payments to the beneficiaries. Since the value of these death benefit payments is less than the face amount of insurance received from the insurance company, the Plan has a net gain from each claim at the time of death.

Expenses of administration of the Plan (including fees to Fringe Programs, Inc.) will be paid from payments received from the employers,

The amounts of the employer payments after deducting insurance premiums and administrative expenses are to be used to secure high grade bonds (AAA classification) that will have an average investment return of 7% per year compounded annually. Presumably the costs of buying the bonds (including any fees for investment advice) will be taken from the remaining gross income available so that the bonds purchased will represent the net amount available for investment after deduction of initial investment expenses.

Separate memorandum accounts will be maintained for each Member in the Plan showing the employer payments made for him, the amounts paid for insurance premiums, the amounts allocated to the funds for investment, and the interest allowed annually by the Plan Trustees.

Interest allocated to the Member Accounts will be a reduction in the investment income to the Plan from the separate fund. The Plan will have a net gain from investment income if the interest allocated to the individual accounts is less than the interest earned on the invested assets.

When-ever a Union Member is terminated as a participant in the Plan, the
payments provided by the Plan are paid to him or to his beneficiary.
Assets of the Plan

The assets of the Plan presumably will be the investments purchased, cash on
hand, and the cash values of the insurance policies purchased on the lives of
Members.
Liabilities of the Plan

There was no discussion of the determination of liabilities of the Plan except a
general statement that the solvency of the Plan had been demonstrated by an
actuarial valuation using reasonable standards. Mr. Ostrer did not have any such
valuation in his office that he could show us.
Life Insurance

The life insurance purchased on the life of each Member is ordinary levelpremium whole-life insurance provided by separate individual policies. The premiums are payable monthly for life. All Members in the working force as of the effective date of the Fund are eligible for insurance as of that date. New Members after this effective date become eligible for insurance on the first quarterly enrollment date following six months of employment for which an employer makes payments to the Plan. The enrollment months are January, April, July and October.

The life insurance granted by the individual whole life policies will be provided on a guaranteed issue underwriting basis without any evidence of insurability. The face amount of insurance for each policy will be level. The amount of coverage will depend on the attained age of the member at the time the policy is issued.

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The formula for determining the face amount of insurance for a policy is as follows: Subtract the Member's age at issue date of the policy from 65 and multiply the result by 50 times the weekly contribution made by the employer on behalf of the Member.

The insurance company issuing the individual policies considers that these policies are in a special classification justifying special premium rates. In order to provide the amounts of insurance determined by the Plan formula for a premium allowance of 49.98% of the employer payments to the Plan, the rates in the premium schedule per $1000 of insurance are arbitrarily reduced at issue ages near age 40 years.

Mr. Ostrer stated that the premium rates charged to the plan are approximately 30% below the rates usually charged for individual ordinary policies. The insurance company pays a commission for each policy issued. The life insurance agent is designated by Mr. Ostrer who is the originator of the severance plan. Mr. Ostrer had designated Dina Gelman as both general and soliciting agent. Dina Gelman is Mr. Ostrer's sister. The officers of Fringe Programs, Inc. the severance plan's administrator are Dina Gelman and Jules November, an attorney. We are advised that Dina Gelman is the sole stockholder in Fringe Programs, Inc.

The first year's commission rate is 50% of the premium. There is no addition for an override commission to a general agent, and no expense reimbursement allowance is involved. The agent also receives renewal commissions for nine years and a persistency bonus for the second through tenth years. The rates for these commissions and bonuses which were not specified by Mr. Ostrer are as follows:

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Note: The payment of persistency bonuses does not appear to be legal under the New York statute.

The Severance Plan owns the insurance policies and is the beneficiary for each of the policies. In the event of a death, the insurance company pays the face of the policy to the Plan. The Plan pays out either (1) the face in ten equal annual installments each equivalent to 1/10th of the original face amount paid to the Plan or (2) the single sum discounted value of those payments, if requested by the beneficiary,

Since the present value of the 10 installments whether paid out over the 10 year period or discounted and paid in one sum is less than the face amount of the policy, the Fund retains part of each insurance claim payment as a gain.

Mr. Ostrer gave out copies of premium and cash value tables for group (term and ordinary) insurance as issued by the Manhattan Life Insurance Company. He explained later that the Manhattan had other premium rates and values for insurance to be issued for severance benefit plans. He did not have these special values for a severance plan available in his office. Life Insurance Company

The life insurance companies issuing the special classifications of individual life insurance policies for use in severance benefit plans are (except for the Manhattan Life of New York) new small companies interested in current volume production. These companies are willing to accept probable losses from poor experience in the future in order to secure a larger total for current amounts of insurance issued and in force. The large and well established old line companies will not consider any part of the life insurance of the severance benefit plans.

The life insurance company for the Plan of Local 295 is the Executive Life Insurance Company of New York in business since 1957 and formerly known as the Citizens Life Insurance Company.

The extra costs to the insurance company of the special classification of policies include (1) the additional death claims from guaranteed issue, (2) the extra death claim costs resulting from anti-selection in the continuance of policies at the time of severance, (3) losses on early lapses before initial expenses are amortized, (4) higher agency renewal compensation, and (5) lack of company experience on which

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to base premium rates. Possible areas of savings for these policies include (1) lower costs for first year commissions and expense allowances than for regular individual policies, and (2) lower issue expenses because of elimination of underwriting. The expense gains of the first year will be available at once and the mortality losses of the later years will be deferred to those later years. This appeals to new companies seeking immediate increases in amounts of insurance. Severance Payments

Upon severance from the Plan after completion of 5 years of Membership, a terminating Member is granted a severance allowance equal to the total employers' payments on behalf of such Member plus interest as allowed annually by the Trustees. The terminating Member can also have the insurance policy (or policies) issued on his life but the cash value of the policy (or policies) is deducted from the withdrawal allowance. If the terminating Member became a Member as of the effective date of the Plan, these provisions apply in the event his termination is at any time including termination in the first 5 years. If the terminating Member became a Member after the effective date of the Plan and his termination date is before the end of 5 years of continuous Membership, there is a forfeiture of part of the accumulated sum otherwise payable. The percentages of value forfeited are as follows: Forfeiture percentages

Forfeiture End of year of membership:

percentage 1

80 2 3

40 4

20 5 and over.

0 This severance allowance is the amount paid if severance from the Plan is for any reason other than death. If the severance from the Plan is because of the death of the Member while actively employed, this severance allowance is changed as follows:

(1) The total premiums paid for the life insurance policy (without interest) is deducted from the total accumulated payments.

(2) Death benefits are paid to the Member's beneficiary as explained in the topic on life insurance.

60

1

COMMENT ON CASE

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The Severance Benefit Plan is essentially a combination of deferred compensation and life insurance for the Members of the Union included in the Plan. The Plan provides specific payments to a terminating Member upon his severance from the Plan. No definition of severance is available but apparently termination of employment because of death, retirement, disability or lay-off with an employer making the required payments to the Plan constitutes severance. Mr. Ostrer did pot explain what happens when a temporary lay-off occurs because of sickness, lack of work, or leave of absence, but he furnished booklets for two Severance Plans other than the Severance Benefit Plan of Local 295. These booklets explain that the insurance for those Plans will continue for 60 days after commencement of lay-off and that the 30 days grace period on the policy will extend the insurance for another 30 days. There is no explanation of how the Plan pays the premium for the 60 days or of who is responsible for the premium for the additional 30 days.

The booklet of the Airline, Aerospace, and Affiliated Employees Severance Fund contains a provision in regard to reinstatement reading as follows:

"In the event a severed employee returns to work he starts anew as a new entrant into the Plan, unless he desires to reenter the plan on a retroactive basis, by returning the total monies withdrawn as severance to his account.'

This provision makes no mention of the life insurance policy. Presumably this policy could be reinstated by the return of the cash value and the payment of past due premiums (with interest on the cash value and on the past due premiums) but there is no indication of who will pay the over due premiums and the interest.

Any temporary termination of contributions by an employer on behalf of a Member could cause substantial problems, especially for the continuance of large premium payments for individual cash value policies.

The severance benefit is provided for a Member who continues in the Plan to his retirement from employment because of age. This is apparently the basis for the IRS classification of a Severance Plan as a pension plan. Since that benefit to

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