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Payment Form Definitions - pension modes

(See also Payment Form Definitions - OPEB mode.)

The parameters of this dialog box indicate the assumed payment form for computing the value, as of the decrement date, of an active member’s stream of pension payments, lump sum payment or life insurance coverage and of an active member beneficiary’s payment stream (under a post-decrement death benefit). For benefits initiated by the “in-service” contingency, the parameters of this dialog box indicate the assumed payment form for computing the value of payments made or insurance coverage provided to the member while in active service.

Each Benefit Definition will refer to one of these Payment Form Definitions as its Normal form. Any Optional forms defined under the Optional forms section of the Benefit Definition will refer to these Payment Form Definitions as well. The Benefit formula section of the Benefit Definition determines the amount (i.e., the annual amount of pension payments, the amount of a lump sum payment or the face amount of insurance) that will be valued under the Normal form, except for cost-of-living increases (COLAs) and statutory / regulatory limits. Thus annuity payment amounts computed according to the Benefit formula may be adjusted for cost-of-living increases. Furthermore, in the U.S. qualified and U.S. public modes, annuity and lump sum payment amounts computed according to the Benefit formula may be adjusted to comply with the maximum benefit limitations of Internal Revenue Code Section 415. In the Canadian registered mode, annuity and lump sum payment amounts computed according to the Benefit formula may be adjusted so as not to exceed the Income Tax Act (ITA) maximum pension amount. In the absence of these adjustments, however, the amount computed according to the Benefit formula is multiplied by the Payment Form value to obtain the value of the benefit as of the decrement date.

A lump sum factor Benefit Formula Component, if used in the Benefit formula, will refer to one of these Payment Form Definitions as its underlying annuity payment form. Please note that the lump sum factor value is part of the benefit amount determined by the Benefit formula, not part of the Benefit Definition’s payment form. This distinction clearly affects the calculation of expected benefit payments and may also result in payment form values that differ according to whether used in a Payment Form Definition or in a lump sum factor component, as may occur in the calculation of vested liabilities.

Note that payment forms for inactive members are defined by Inactive Payment Form parameters, which are similar to those used to describe payment forms for actives. There are some differences, however, because inactive payment forms may represent actual, rather than assumed, elections and because, for an inactive member, decrement from active status has already occurred.

Several types of payment form, as listed later in this article, are available for active member benefits initiated by one of the four decrements or by the in-service contingency. The annuity types, except for the modified cash refund annuity, are available for lump sum factors. Some of the payment form types are restricted to only some of ProVal’s modes of operation, as indicated in the discussion below of each type.

For each type, deferral of receipt of the annuity, lump sum or insurance coverage may be indicated. For each annuity or insurance type, temporary receipt of annuity benefit payments or insurance coverage may also be indicated, with the exception of annuities that provide a certain period, i.e., a period during which benefit payments are certain to be made, regardless of whether the member or beneficiary is then alive. Note that life contingencies apply to payments made during a temporary period. Thus, a temporary period is a maximum length of time for which benefits are paid or insurance is in effect, whereas a certain period is a minimum length of time for which benefits are paid.

For all Payment Form Definitions, regardless of Type, if the Benefit Definition that refers to the Payment Form Definition is initiated by the retirement, termination, disability or in-service contingency, then the benefit is paid to the member. Life contingencies in the Payment Form Definition depend upon the member’s age and sex and thus reflect member mortality. If, however, the Benefit Definition that refers to the Payment Form Definition is initiated by the contingency death, then benefit payments are made to the beneficiary upon the member’s death. Life contingencies in the Payment Form Definition thus depend upon the beneficiary’s age and sex and reflect beneficiary mortality. To apply beneficiary mortality, ProVal assumes that the beneficiary’s sex is the opposite of the member’s and that the beneficiary’s age reflects the age difference specified by the Number of years husband is older than wife parameter of the Other Valuation Parameters topic of the Valuation Assumptions. For a lump sum factor used in a death benefit, the underlying annuity payment form may be based on member or beneficiary mortality, age and sex, at your option.

Payments are discounted for survivorship, if applicable, according to the mortality tables to be used for active mortality after decrement from active status (which might not be the same mortality basis as for active mortality before decrement). To determine beneficiary mortality rates, used for joint life payment form Types, for post-decrement death benefits and for single life Types initiated by death, ProVal assumes the beneficiary to be of opposite sex from the member and the age difference between husband and wife to be that indicated by the Other Valuation Parameters topic of the Valuation Assumptions.

Payments are discounted for interest at the valuation interest rate(s), lump sum factor interest rate(s) and/or specialized liability interest rate(s), as applicable. The formulas ProVal uses to compute the present value of payments under each annuity or insurance payment form are contained in the Technical Reference article Present Values: Benefits payable (m)thly.

For each annuity Type, the Benefit payment frequency may be annual, semi-annual, quarterly, monthly or continuous; the Annuity payment timing may be “beginning of period” (for an annuity-due) or “end of period” (for an annuity-immediate). The options for these two parameters are selected under the Plan Attributes topic of the Plan Definition.

For joint life payment form Types, the fraction of the population assumed married and receiving a joint and survivor annuity is determined by the Fraction of population that is married and, in the U.S. qualified, U.S. public and universal modes, Fraction of married population electing J&S option parameters of the Other Valuation Parameters topic of the Valuation Assumptions.

Note: If a lump sum type of Payment Form is specified but the “true” payment form is an annuity embedded in the Benefit formula by use of either a table or a lump sum factor type of Benefit Formula Component, special considerations apply with respect to the U.S. Internal Revenue Code section 415 maximum benefit limits and may apply with respect to the Canadian ITA maximum pension amount. For U.S. plans, see the discussion of conversion of the life annuity 415(b) Maximum Benefit Limit to a lump sum maximum benefit limit. For Canadian plans, see the discussion of conversion of the life annuity ITA Maximum Pension amount to a lump sum maximum amount.

When the payment form Type is selected, the rest of the dialog box will change to present only the parameters applicable to the selected form. Except for the Post-decrement Death Benefit form, which has unique parameters, and the Modified Cash Refund Annuity, which has a parameter to define the amount to be refunded, the additional parameters define (only) deferral, joint and survivor benefit fractions for the joint life annuity types and, perhaps, a certain period or temporary period.

For either Type of joint life annuity, the parameters that determine the fraction of benefit received during the single and joint lifetimes of the plan member appear before the other parameters of this dialog box but are discussed near the end of this article (following discussion of most of the other Payment Form Definition parameters).

For modified cash refund annuities, select from the list of components unhidden in the current Project (or click the image/backdoor_button.gif button to create a new component) the Benefit Formula Component that calculates the value of the Guaranteed amount at decrement date, that is, the value, at the date of the member’s decrement from active status, of the guaranteed amount to be refunded in the event of the annuitant’s death (the annuitant is the plan member unless the benefit paid as a modified cash refund annuity is initiated by the “Death” Contingency). ProVal considers this the minimum amount that will be paid, in total, as annuity benefits and, at the annuitant’s death, as a lump sum to the beneficiary. If the guaranteed amount has been exceeded by the adjusted sum of benefit payment amounts, reflecting annuity payments up to the time of the annuitant’s death, there will be no payment to the beneficiary. If commencement of benefit payments is deferred under this modified cash refund annuity, you must enter an interest rate for the deferral period, which runs from the decrement date to the benefit commencement date. Note that interest will be credited only until benefit payments start, not subsequently until the annuitant’s death. The interest rate is specified under the Increase & Crediting Rates topic of Valuation Assumptions (and, in a Core Projection, of Projection Assumptions). Note that the same interest rate is used during a deferral period for all modified cash refund annuity payment forms you define, including any for inactive members.

Indicate when the Benefit commences (and temporary period begins) or Benefit commences (and certain period begins) or insurance Coverage commences (and temporary period begins) or lump sum Benefit paid, by selecting one of the following:

If deferral is until a specified age, enter the first age at which a payment is made or insurance coverage is in effect. Likewise, if deferral is until an age specified in a database field, the field value should be the first age at which a payment is made or insurance coverage is in effect. Note that the member’s age, not the beneficiary’s age, should be provided, even if death initiates the annuity payments or insurance coverage. (In the, atypical, situation that your plan provides for deferral until a specified beneficiary age, then specify the corresponding member age, determined according to the marital assumptions of the Other Valuation Parameters topic of Valuation Assumptions.) If an active member decrements at an age beyond a commencement age indicated by the deferral parameter, there will be no deferral of the annuity, insurance coverage or lump sum payment.

The last deferral period option, the benefit commences after a number of years derived from a table, is intended for a plan benefit with a payment deferral period that varies with the decrement date, generally according to the member’s attained age and/or completed service at decrement. Select the associated table from the list of Benefit Component Tables already defined in the current Project, or click the image/backdoor_button.gif button to access the Benefit Component Table library and create new tables or modify existing ones. The table may be sex-distinct or unisex and table values may vary by age, service or by both age and service. This option can also be used, in conjunction with the Temporary period stops parameter, for a benefit that changes, after commencement, at a future payment date that varies according to age and/or service. An example of the latter (more complex case) is given below, at the end of discussion of the Temporary period stops parameter. Note that if a zero value is shown in the table, then, for that age and/or years of service at decrement, there is no deferral (literally, the benefit is deferred zero years) and, thus, benefit payment or insurance coverage starts immediately.

Indicate when the Temporary period stops by selecting one of the following:

If the temporary period stops at a specified age, enter the first age at which an annuity payment will not be made or insurance coverage will no longer be in effect. Likewise, if the temporary period stops at an age specified in a database field, the field value should be the first age at which an annuity payment will not be made or insurance coverage will no longer be in effect. Note that the member’s age, not the beneficiary’s age, should be provided, even if death initiates the annuity payments or insurance coverage. (In the, atypical, situation that your plan provides for cessation of benefit payments or insurance coverage at a specified beneficiary age, then specify the corresponding member age, determined according to the marital assumptions of the Other Valuation Parameters topic of Valuation Assumptions.) The temporary period begins on the commencement date indicated by the deferral parameter; thus, if you specify a temporary period that ends at an age prior to a specified commencement age, there will be no annuity payments or insurance coverage.

The last temporary period option, the temporary period stops after a number of years derived from a table, is intended for a plan benefit with a temporary payment period that varies with the decrement date, generally according to the member’s attained age and/or completed service at decrement. Select the associated table from the list of Benefit Component Tables already defined in the current Project, or click the image/backdoor_button.gif button to access the Benefit Component Table library and create new tables or modify existing ones. The table may be sex-distinct or unisex and table values may vary by age, service or by both age and service. This option can also be used, in conjunction with the Benefit commences (and temporary period begins) parameter, for a benefit that changes, after commencement, at a future payment date that varies according to age and/or service. An example of the latter (more complex case) is given below. Note that if a zero value is shown in the table, then, for that age or years of service at decrement, there is no period of benefit payment (literally, the benefit is paid over a temporary period of zero years) and, thus, no benefit payments will be valued.

Fractional temporary periods will be rounded.

For modified cash refund annuities, when the temporary period expires the entire benefit expires, even if the guaranteed amount has not been exhausted. Any guaranteed amount remaining when benefit payment stops will not be valued.

Note that the table option of the Benefit commences (and temporary period begins) and Temporary period stops parameters is useful for a plan benefit that changes, after commencement, at a number of years that varies according to the age and/or service of the member at decrement. For example, suppose the plan provides a different benefit formula for payment years after a retired member would have achieved 85 points (had he/she remained in active service) based on service at decrement (that is, only age advances, at 1 per year, until each payment date). This can be coded as a temporary annuity payable until 85 points are achieved and an annuity deferred until the member achieves 85 points. Create a table that varies by age and service and select it for both parameters. Enter values of 0 for age/service cells where age + service is equal to or greater than 85. For age/service cells where age + service is less than 85, enter 85 minus the sum of the age and service indices. Thus, for example, at the cell for age 60 and 20 years of service, five years have to elapse before 85 points would have been attained [85 - (60 + 20) = 5), so enter “5”.

Indicate when the Certain period stops by selecting one of the following:

If the certain period expires at a specified age, enter the first age at which a payment is not certain to be made. Note that the member’s age, not the beneficiary’s age, should be entered here, even if death initiates the annuity payments. (In the, atypical, situation that your plan provides for expiry of the certain period at a specified beneficiary age, then enter the corresponding member age, determined according to the marital assumptions of the Other Valuation Parameters topic of Valuation Assumptions.) The certain period begins on the commencement date indicated by the deferral parameter; thus, if you specify a certain period that ends at an age prior to a specified commencement age, there will be no certain period and no payments are certain to be made.

The three Fraction of Joint & Survivor benefit received when parameters (Both member and beneficiary are alive, Only the member is alive, Only the beneficiary is alive) indicate the fractions of the annuity payment amount, as determined by the Benefit formula, that are paid under the respective survivorship statuses. These fractions may be either contained in a Database field or input as a Constant value.

For example, if there is no certain period and constant values of 1, 1 and 0.5 are entered for these fraction parameters, respectively, then the payment form will be:

Note that the annuity payment amount computed according to the Benefit formula is multiplied by the fraction payable when only the member is alive to determine the annuity payment amount received by the unmarried portion of the population and (except in the Canadian registered and German modes) by the married portion not electing the joint and survivor option. Thus, in the preceding example, all payments to the unmarried portion of the population, and (again, except in the Canadian registered and German modes) to the married portion of the population not electing the joint and survivor option, are for the full Benefit formula amount (perhaps adjusted as mentioned, at the beginning of this article, for COLAs and statutory / regulatory limits), but if 1, 0.5 and 0.5 are entered, then all payments to the unmarried portion of the population, and (except in the Canadian registered and German modes) to the married portion of the population not electing the joint and survivor option, are for half of the Benefit formula amount.

Similarly, if constant values of 1, 0 and 0 are entered, then the payment form for the fraction of the population assumed married and (except in the Canadian registered and German modes) electing the joint and survivor option is an annuity paid only during the joint lifetime of the member and beneficiary. If 0, 0 and 1 are entered, then the payment form is a reversionary annuity to the beneficiary after the member’s death. If the assumed payment form of a Benefit Definition is a joint and survivor annuity with a “pop-up” feature, the Benefit formula should be coded to calculate the initial payment amount during the joint lifetime of the member and beneficiary (perhaps subject to adjustment as mentioned, at the beginning of this article, for COLAs and statutory / regulatory limits). Compute the ratio, m, of the benefit payment amount when only the member is alive (i.e., the amount the benefit pops up to after the beneficiary dies) to the Benefit formula amount. If b is the fraction of the initial payment amount payable when only the beneficiary is alive, then enter 1, m, and b.

Note that the payment amount during a certain period, if any, is constant and does not depend on the fraction parameters. Each payment made during the certain period is equal to the amount computed by the Benefit formula (perhaps adjusted as mentioned, at the beginning of this article, for COLAs and statutory / regulatory limits).

Note: If a life annuity is to be paid to the beneficiary upon an active member’s death, then select a life, not a joint and survivor, annuity Payment Form. Because the contingency initiating the benefit payments is death, ProVal understands that payments are made for the life of the beneficiary, not the member, and the Payment Form value thus reflects the beneficiary’s age, sex and mortality. However, if a life annuity is to be paid to the beneficiary upon the member’s death after retirement, termination or disablement has occurred (usually during a deferral period during which the member receives no benefit payments), then the Payment Form must be coded as a joint and survivor, not a life, annuity. (If coded as a life annuity for these contingencies, ProVal understands the single life Payment Form to refer to the member, not the beneficiary.) The fraction parameters would be 1, 0 and 1, to indicate that 1 is paid when the beneficiary is alive and no payment is made when only the member is alive, i.e., this is a life annuity to the beneficiary.

You may enter a value between 0 and 5, inclusive, for these fractions (note that a warning will be issued at processing time if the fraction is not between 0 and 2). Enter a decimal number, not a percentage. The fractions normally range between 0 and 1, but a joint and survivor annuity with a “pop-up” feature typically requires a Fraction of Joint & Survivor benefit received when only the member is alive value that is greater than one. Note that if the Beneficiary determined at parameter (described below) is set to “member death”, then the Fraction of Joint & Survivor benefit received when both member and beneficiary are alive parameter will not be available, because the spouse does not functionally “exist” until the member has died.

For joint life annuity payment forms, the Beneficiary determined at parameter specifies whether the marital status will be determined at the time of decrement from active status, at benefit commencement or at member death. Any beneficiary will be assumed living at that time. If “decrement” is selected, the fraction married and spouse age difference will be determined at decrement, and beneficiary mortality will be applied during a deferral period (if any) as well as after annuity payments commence. If “commencement” is selected, the fraction married and spouse age difference will be determined at commencement of annuity payments, and beneficiary mortality will not be applied until that time (thus only member mortality will be applied between the decrement date and the commencement date of a deferred annuity); if the member dies during the deferral period, there will be no benefit payable to a beneficiary. If “member death” (not available for a certain & joint life payment form) is selected, the fraction married and spouse age difference will be determined separately at each age of potential member death, and spouse mortality will be applied starting at each possible age of member death. If the member dies during the deferral period, the spouse will receive a benefit deferred to the member’s deferral age. (If the member dies during the payment period, the spouse will receive an immediate benefit.) Note that beneficiary determination at member death is the only option available in the German pension mode, and beneficiary determination at commencement is the only option for payment forms that commence at post-termination retirement age.

See the Technical Reference article on joint & survivor payment forms for more information.

The Table service based on parameter (not applicable to a Post-Decrement Death Benefit payment form) is accessible if any tables are referenced for setting deferral, temporary or certain periods and the table has a service dimension. This parameter is used to define service for look up in the table. The preset option, “<rounded attained age – rounded hire age>” indicates that service will be computed as the difference between rounded attained age (as of the decrement date) and rounded hire age. (See also the discussion of the date of hire (or hire age) parameter under the Active Data topic of the Census Specifications command.) Alternatively, Table service may be based on a database Field; select from the list of database fields in the current Project. You may refer to a date field from which to measure service or to a numeric field containing service as of the valuation date. Note that selecting, by name, the date of hire field of the Active Data topic of the Census Specifications might not produce the same result as the preset option. This is a consequence of the fact that if a database field is selected, truncated service based on the field is used. That is, if you select the date of hire field by name, ProVal subtracts the hire date from the decrement date and then truncates. The result may be lookup service of one year more or less than lookup service computed as the difference between rounded ages at the valuation date and at hire. For more information about table lookups, see the discussion of table interface. If you need fractional table service (e.g., hours-related service) or rounding (e.g., completed years), select from the library of Service Definitions. The image/backdoor_button.gif button accesses the library to create and modify Service Definitions.

For lump sum benefits, if you would like the benefit divided into installments, check the Divide into box and enter the number of equal annual installments into which the benefit will be divided, as an integer between 1 and 120, inclusive. Furthermore, if you would like the number of installments reduced if the payment would fall below a specified amount, enter the minimum amount in the or fewer if amount would fall below text field. (Regardless of your entry, there will be at least one payment.) In this case, the Benefit formula should specify the total amount of the lump sum before it is divided into installments. If there is interest applied to unpaid installments, check Apply interest of and select whether the interest is specified as a constant entered directly in the payment form definition (in all modes other than UK mode), or specified in COLA assumptions (in Valuation and Projection Assumptions). Note that survivorship (mortality) probabilities will apply during the installment period if the lump sum payment form Type selected is “Lump Sum, Life Contingencies”; if “Lump Sum, No Life Contingencies” is selected instead, only interest will apply during the installment period, not survivorship.