Calculating SAWW in Life Pension/100% Awards

Saturday, October 11, 2003 | 0

While most of the 2002 amendments to the California Labor Code that peg indemnity to the State Average Weekly Wage (SAWW) don't go into effect until 2006, Labor Code section 4659 contains a little noticed provision that goes into effect 1/1/04 for injuries 1/1/03 and later:

"(c) For injuries occurring on or after January 1, 2003, an employee who becomes entitled to receive a life pension or total permanent disability indemnity as set forth in subdivisions (a) and (b) shall have that payment increased annually commencing on January 1, 2004, and each January 1 thereafter, by an amount equal to the percentage increase in the 'state average weekly wage' as compared to the prior year. For purposes of this subdivision, 'state average weekly wage' means the average weekly wage paid by employers to employees covered by unemployment insurance as reported by the United States Department of Labor for California for the 12 months ending March 31 of the calendar year preceding the year in which the injury occurred."

By itself this added subsection appears relatively benign. But the true import of this amendment becomes significant when a commutation or settlement of a life pension or 100% award is contemplated, for it would be malpractice on the part of the applicant attorney to fail to consider the compounding effect of the annual increase to the SAWW.

Workcompcentral has updated the life pension commutation calculators to take into account the SAWW adjustment, permitting the user to select the rate at which the SAWW will increase, on average. For the last five years, the increase has averaged 2 percent, accounting for one year where the SAWW actually decreased (though the statute provides adjustment only for increases).

An issue arises when performing a commutation taking into account LC 4659 as to when to account for the SAWW. Since there has not been any decision from the DWC as to how to apply this factor, it was decided that the application that made the most sense was to apply the SAWW increases to the present value of weeks determined using the commutation formulas. In other words, we decided to run through the commutation algorithm to obtain the present value of the weeks remaining in the life pension, then "loop" through the annual increases to arrive at a total commuted value and the "final payment" value applicable under such a scenario.

The following are comparisons of the results obtained using the above method:

Assume for the purposes of this exercise the following: a male with a date of birth of 10/02/64, date of injury of 1/2/03, a PD rating of 100% with maximum earnings which would produce a weekly rate of $602, date of commutation of 10/15/03, and a PD commencement date of 8/01/03 (in this case the total weeks of PD would be zero since the TD rate is applicable as PD and there is no distinction between PD and life pension).

If we were to perform a commutation of all of the life pension without adjusting for the SAWW, then the commuted value is $666,329.72.

But, if we were to adjust this to conform to a 2% annual increase in the SAWW (the SAWW for California over the past five years has risen on average approximately 2 percent per year), then the life pension rate for the year the life expectancy tables indicate as the last year of payment is $930.68, and the commuted value increases to $833,477.80.

If we assume the same facts except for a PD rating of 80%, which produces a life pension rate of $77.31 after 516.5 of PD have paid out, then a commutation of all LP prior to the commencement of life pension payments, without adjusting for the SAWW, produces a final weekly LP payment value of $77.13, and a commuted value of $52,154.10.

Adjusting for a 2% increase in the SAWW, starting with the first date that the weekly LP payments are to begin (which is 516.5 weeks after commencement of PD, or 6/24/2013), then the final weekly LP payment value is $100.01, and the commuted value of all LP is $59,445.15.

As no official edict has issued as to the correct method of calculation for this liability, workcompcentral is inviting discussion on whether this calculation method is correct and alternative proposals for accounting for increases in the SAWW as applicable to life pension and 100% awards. Please use the WCC Tech category in our Professional Forums for this purpose.

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POSTSCRIPT

Blair Megowan, Manager of the DWC Disabilities Evaluation Unit, has opined:

I believe the actual present value is quite a bit higher.

My calculation yielded about $96,489.

It sounds like you might be treating the LP as though it has someend date, perhaps based on life expectancy. Otherwise, there would be no way to calculate the "final" LP rate.

My basic approach was to treat the life pension as a series of payments made until the probability of the worker of being alive to receive them reaches zero.

The rate of each payment was determined by the amount of time that had elapsed since the date of commutation. The SAWW-enhanced payment was in turn discounted by 1.03 annually and multiplied by the probability of living to receive each individual payment based on the U.S. Life Tables.

We have modified the life pension calculators to conform to this opinion, but still invite comment and opinion.