FINANCIAL PROJECTIONS

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

-- 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 contributions would have been applied to insurance premiums and administrative costs. This deficit would eventually 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.

--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.

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.

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 noninception 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

benefits with the two termination scales. The present value of contributions, benefit payments, and other costs are shown here as percentages of employer contributions.

They

The first 2 columns in the table show the projected results as if only the 1,332 members included in the November 1971 census were to be covered by the Plan. assume that no new members would be brought into the Plan and therefore that contributions would not be forfeited, which would happen if noninception members would terminate during the first 5 years of coverage. Therefore, the results shown in the first two columns represent the most conservative estimate of the Plan's operations.

In actual practice, it would have been expected that as inception members terminated, new members would have been brought into the Plan. As new members were admitted, of whom a portion could have been expected to terminate with little coverage, the Plan would have gained financially. The bottom line of the table indicates the effect on the financial position of the Plan if allowance is made for some of the members to have terminated before completing 5 years of membership thereby forfeiting all or a portion of the contributions made on their behalf.

From the analysis presented above it appears that, if inception members who would have terminated were replaced by new members, the ultimate gain to the Plan should have more than offset losses from terminating inception members.

Cash-flow projections

The cash-flow analysis shown below was made to determine if the Plan would have had enough cash to pay benefits as members terminated. Cash-flow projections over the first 11 years indicated that the Plan should have had a sufficient cash flow.

ACTUARIAL STUDY BY LAWRENCE R. SCHIFF ASSOCIATES

In June 1971, Lawrence R. Schiff Associates submitted to Fringe Programs, Inc., an actuarial study of the Plan's operation which projected (1) the Plan's income, expenses, and cash position for each year through November 30, 1981, and (2) the Plan's assets and liabilities as of December 1, for each year through 1981. The Schiff study showed that

--the Plan could have maintained a satisfactory cashflow position through November 1981 and

--the Plan's assets would have become equal to its
liabilities during the year beginning December 1,
1979.

The

The results of the Schiff projections presented a somewhat more favorable picture of the Plan than our study did. actual experience of the Plan during its first year of operation had a significant impact on the assumptions made for our projections. Some of the significant differences in assumptions follow.

1.

2.

3.

Schiff assumed that death benefits would be paid
in annual installments over a 10-year period as
provided for in Plan documents. Because all
claims during the first Plan year were actually
being paid on a lump-sum basis (discounted at
6 percent per year), our projections are based on
the assumption that this practice would have
continued.

Schiff assumed that death-benefit payments would include gross contributions made on behalf of the member, less the cost of his insurance policy. During the first year of the Plan, this was not the practice. Our computations assumed that the practice of returning gross contributions would be continued.

Schiff apparently did not include any expenses for rent and for legal, auditing, or clerical services. Our projections are based on the assumption that such expenses would have been about 2 percent of the employers' contributions as was the case during the first Plan year.