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CHAPTER 3

WAS THE PLAN PROPERLY FUNDED?

A test commonly used for determining the soundness of the financing of an employee benefit plan (such as the Local 295 Plan), is simply to determine whether the plan will be able to pay the benefits, provided under its terms in the future, assuming that the plan will not be modified. To pass this test, the plan's present value of expected future receipts, together with its existing assets, must equal or exceed the present value of benefits and expenses expected to be paid in the future. In addition, at no point in the future should the fund's cash position be projected as negative..

Applying the above criteria to the Plan, as it operated during the first 16 months, our calculations show that if the Plan were to have been terminated at November 30, 1973, the expiration date of the present union-management agreements:

--The Plan could not have been expected to have suffi

cient assets to pay benefits as they were determined during the first 16 months or to pay such benefits immediately upon its termination because earnings during the first 3 years would not have been sufficient to offset the expenditures made for insurance premiums, administrative expenses and benefit payments.

--It would have taken from 15 to 20 years before the

Plan's earnings would have put it, if terminated, in the position to immediately pay termination benefits (contributions made on member's behalf, subject to forfeiture conditions for noninception members).

Although our projections based on the assumptions stated on pages 21 to 22 indicate that, if the Plan had been continued, it should have been in a position to pay benefits (as determined during the first 16 months of the Plan) as members terminated, we feel constrained to point out the following reservations.

--The soundness of projections is dependent on how

closely the assumptions predict future experience.
Our assumptions regarding termination rates are based
on data covering a relatively short period -- about
7 months--and therefore would have been subject to
greater uncertainty than usual for such projections.

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--Plan documents were loosely worded and contradictory

in some respects and our interpretations of Plan provisions were based largely on the actions of the trustees during the first year of the Plan's operation.

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-- Future economic conditions can strongly affect the

Plan's financial condition. For example, employers may not be able to continue the work force at the present level or to continue to make contributions at the specified rate.

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Our projections and comments should be considered in the light of these reseryations.

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ASSUMPTIONS UNDERLYING OUR PROJECTIONS

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To project the monetary effect of transactions which could have been expected to take place in the future, it was necessary to make the following assumptions about the Plan's operations.

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Date of valuation-- December 1, 1970, the date the Plan became operational.

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Number of members --An estimated 1,332, inception members.
It was assumed that Plan membership would be maintained
at this level.

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Ages of members --The age distribution of new members
is assumed to be identical to the distribution of ages
of inception members.

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Employer contribution (per member) --$15 per week during
the first Plan year, $30 per week during the second
year, and $40 per week during the third and subsequent
years.

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Mortality rate--1960 Commissioners Standard Group Mortality Table.

Interest earnings--5 percent per annum.

Insurance premium rates--Rates charged the Plan by Executive Life.

Cash value of policies--Estimates based on whole life policies issued on Plan members by Executive Life.

Face amounts of insurance policies-- Based on the coverage described on pages 8 to 9.

Administrative expenses--Estimates were developed based on the actual expenses incurred by the Plan during its first year of operation. (See pages 37 to 38.)

Rates of terminations--On the basis of experience during the first 7 months of operation, estimates were developed of the rate at which members would terminate from the Plan. Because the data available on the Plan's termination experience was extremely limited, we developed two sets of termination rates. Scale A assumes a higher rate of termination which would be unfavorable to the Plan because early terminations of inception members (except perhaps by death) will result in Plan losses. Scale B assumes a lower rate of terminations and therefore presents a less conservative view of the Plan's financial position. (Termination rates used are detailed in Appendix II.)

Benefits--Our projections assume that payments will continue to be made on the same basis as during the first 16 months of the Plan.

FINANCIAL PROJECTIONS

The following aspects of the Plan's benefit structure are significant in understanding the results of our financial projections.

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-- The Plan would have incurred a loss when an inception

member terminated (for reasons other than death),
during its first few years because the member would
have received a return of gross contributions made on
his behalf even though about half of these contribu-
tions would have been applied to insurance premiums
and administrative costs. This deficit would even-
tually have been negated in later years when the
Plan's earnings on investments plus the cash value of
the insurance policies and the discount on death
claims were built to an amount sufficient to offset
the insurance and administrative costs.

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-- The Plan would have gained when noninception members

terminated during the first few years of membership in the Plan because the vesting provisions did not provide the member a full return of the employers' contributions until the member had been covered by the Plan for 5 years or more, Also, contributions began at least 6 months before an insurance policy was issued on a member's life.

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Projection of assets and liabilities

The following tabulation compares the liabilities and assets projected for the Plan through November 30, 1989. This projection was based on the assumption that member terminations would be at the rate envisioned in scale A, and therefore the projection was conservative.

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44 54 62 69 75 79 81

83

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

$ 400

1,300 2,600 4,000 5,500 6,900 8,200 9,400 10,500 11,400 12,300 13,200 14,000 14,800 15,600 16,400 17,300 18,300 19,400

$ 900

2,400 4,200 5,800 7,300 8,800 10,100 11,300 12,300 13,300 14,100 14,900 15,600 16,200 16,700 17,300 17,800 18,300 18,900

85 86 87 89 90 92 93 95 97 100 103

Assets are comprised of cash, investments, and cash values of the life insurance policies. The liabilities are equal to the gross contributions made on behalf of active members (with the appropriate vesting percentages applied to the contributions for non inception members).

As shown above, the Plan's liabilities could not have been considered fully funded until after the Plan had operated for about 20 years. Had it been terminated before that time, the Plan probably would not have had assets sufficient to immediately pay the termination benefits as they were determined during the first 16 months of the Plan.

Projections of contributions and expenses

The following table shows the estimates of net gains or losses from Plan operations for the two classes of

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