Vested inactives valued as active
ProVal allows terminated vested participants to be processed as if they were active participants, by means of a special status code. The "Vested valued through active" status is, in some sense, a hybrid status in that it permits participants to be valued using ProVal features previously reserved for active participants – e.g., retirement rates (instead of a single assumed retirement age), early retirement reduction factors (varying by benefit commencement age), post decrement probabilities to code optional forms of payment with probabilities of receipt (instead of assumed retirement on only one payment form) and lump sum Benefit Formula Components – while recognizing that some aspects of the calculations must be modified to reflect the true inactive status of these participants (e.g., exclusion from the active age/service scatter chart, as well as from plan totals of such output variables as Valuation Salary, Valuation Number, normal cost and active liabilities). The access this status code provides to retirement rates is particularly useful in the U.S. qualified mode, under PPA law, for valuing at-risk liabilities “automatically”, i.e., without having to include an override Valuation (or Core Projection) for PPA at-risk liabilities in a Valuation Set (or Deterministic Forecast or Stochastic Forecast).
The Valuation Assumptions used to value the benefits for "Vested valued through active" participants (this status code will be referred to as “vested-as-active” throughout the remainder of this article) generally will be those applied to actives. Similarly, the benefits valued for vested-as-active participants will be determined by the Benefit Definitions contained in the Plan Definition, rather than by Inactive Benefit Definitions. Sample Life reports related to the Plan Definition's benefits will be available for vested-as-active sample lives, as are other Sample Life reports generally available only for Active participants.
In accordance with the true inactive status of vested-as-active participants, their results are included with inactive results, rather than with those for active participants. (Valuation command Individual Results for these participants are also stored with the appropriate Inactive fields.) Because the liabilities for the vested-as-active status are correctly categorized by ProVal, using this hybrid status will not complicate the creation of valuation reports by means of either ProVal’s Report Writer or other reporting tools.
Storage of vested-as-active results with inactive results precludes display of their results in Output Detail, and writing the corresponding Individual Results, "by decrement" and "by selected benefits". As stated previously, however, Sample Life reports with such detail are available for vested-as-active participants and can be used to examine the calculations performed.
Use of the vested-as-active status is indicated by means of the Status Code Mappings topic of the Census Specifications; simply map the appropriate status field code to ProVal's vested-as-active status. If you do not wish to value all current (i.e., as of the valuation date) terminated vested participants in this manner, you may modify the Data Dictionary's definition of your data's status field to add a distinct code to be used for such participants; you would then, in your Census Specifications, map only the new code to the vested-as-active status, while preserving the mapping of the existing code used for those vested participants you want to continue to value as “Vested”.
Data Requirements
As is the case for active participants, vested-as-active participants must have valid values for the database fields referenced under the Active Data topic of the Census Specifications. Data Defaults can be used to supply values for those vested-as-active participants who are missing required data, as may be the case, for example, for the field specified as the Date of hire (or hire age) parameter and/or the salary fields referenced by the Valuation Salary Definition. Note that vested-as-active participants' values for the salary fields in the Valuation Salary Definition are ignored by ProVal in its determination of active Valuation Salary, Total Salary and Present Value of Future Salary. (ProVal will, however, recognize active-as-vested participants' salary data should you wish to reference the Valuation Salary Definition in the benefit coding for these participants.)
Decrement Assumptions
Because the vested-as-active participants are treated like any other active participants for valuation purposes, they will be subject to the specified active member mortality prior to the assumed retirement date and then to the specified retired member mortality (or inactive member mortality, for a “PPA” applicable law type of Valuation Assumptions in the U.S. qualified mode, as mortality rates may vary for pre-commencement and post-commencement periods) when they are ultimately assumed to retire. This applies both for expected (Valuation Assumptions) decrements and experience (Projection Assumptions) decrements. If your mortality assumption varies by status and, for valuation purposes, you want these participants to be subject to the mortality for vested terminated participants, you can either (1) run them in a separate Valuation (or, for a forecast, a separate Core Projection) in which all mortality assumptions (i.e., both while the member is active and after the member retires) are set to the vested terminated mortality or (2) set your mortality assumptions to vary by coded field and specify the active mortality and retired mortality for these participants to be your vested terminated mortality assumption.
ProVal recognizes that the only active decrements applicable to vested-as-active participants are mortality and retirement because the decrement from active status has already occurred. The retirement decrement applicable to the vested-as-active participants is specified by the post-termination retirement assumptions of the Decrements topic of Valuation Assumptions and Projection Assumptions. This allows you to have different retirement rates for your active and vested-valued-as active participants. Also note that if the disability or termination rates specified in the Valuation Assumptions or Projection Assumptions would, if applied to vested-as-active participants, yield non-zero rates, ProVal will zero out the rates and produce a warning message. Note also that, as the decrement has already occurred, “retirement” means commencement of benefit payments.
Benefit Definitions
Although it is possible for your plan to contain a benefit that applies both to those vested participants valued as active and "truly" active participants (i.e., their ProVal status is “Active”), it is more likely that you will have distinct Benefit Definitions for these two categories (because, typically, the benefit of a "true" active member grows with service, whereas the benefit of a terminated vested member is likely to be frozen). Use the Applies to: check boxes of the Status & Contingency initiating benefits section of the Benefit Definition to indicate whether the benefit applies to Actives, Vested valued through actives or both statuses.
Typically you will need two, or possibly three, Benefit Definitions for the vested-as-active participants:
One Benefit Definition will be for the retirement benefit. Note that, because a vested-as-active participant is already in a deferral period (i.e., the decrement from active status has already occurred), an immediate (not deferred) Payment Form is expected for this Benefit Definition.
Another Benefit Definition will be for any death benefit payable if the participant dies prior to retirement. When these participants are valued under the inactive vested terminated status code, this death benefit is typically coded using a Post-decrement Death Benefit Payment Form. When they are valued as actives, however, the Payment Form for the beneficiary would be a life annuity, for which ProVal will automatically use the beneficiary age and mortality, as determined under the Other Valuation Parameters topic of Valuation Assumptions, to evaluate.
Please note that there is a small liability difference between valuing a vested participant with an inactive Post-decrement Death Benefit and valuing a vested-as-active participant with a parallel death benefit: Post-decrement Death Benefits assume death during the year and benefit commencement the beginning of the following year, whereas active death benefits assume death and commencement in the same year.Another difference may arise because of the way in which ProVal determines marital status and applies spouse survival probabilities. For a vested-as-active participant, for purposes of the death benefit, ProVal determines marital status at member death. For a vested inactive participant coded in the traditional manner, however, ProVal determines marital status either 1) at the valuation date, in which case the participant is assumed 100% married if a spouse date of birth and sex are present on the participant database record, and the marital assumptions of the Other Valuation Parameters topic of Valuation Assumptions will be applied if spouse data are not present; or 2) at member death, in which case the marital assumptions of the Other Valuation Assumptions topic will always be applied. ProVal begins applying probabilities of spouse mortality once marital status is determined. Therefore, for a Post-decrement Death Benefit for a vested inactive with marital status determined at the valuation date, spouse survival mortality will apply beginning on the valuation date. In contrast, for a vested-as-active death benefit, or for a Post-decrement Death Benefit to a vested inactive with marital status determined at death, spouse survival mortality will not be applied until the member’s death.
Lastly, differences in liabilities may arise when using the “Pre/post commencement” type of mortality table (such as to value U.S. PPA liabilities), because of how ProVal determines commencement for inactive (thus “true” vested) post-decrement death benefits versus active death benefits (and thus vested-as-active participants’ death benefits). ProVal assumes pre-commencement member mortality for valuing benefits initiated by the “death” Contingency (how post-decrement death benefits are coded for the vested-as-active status). However, for a “post-decrement death benefit” type of Inactive Payment Form (how post-decrement death benefits are coded for the "Vested" status), ProVal uses post-commencement member mortality starting at the member commencement age specified by the Inactive Payment Form.
Note that ProVal bases annuity factors for inactive participants on the participant’s age nearest birthday (as of the valuation date or decrement date). For active participants (and consequently, for vested-as-active participants), first retirement eligibility is based on attained age. Therefore, in order to obtain vested-as-active results that are consistent with the results obtained by using a status code mapped to “Vested”, it may be necessary to adjust the earliest retirement age by one half year when beginning of year decrement timing is used; for example, if retirement eligibility is attainment of age 65, enter 64.5 as the age in the Conditions (no less than) grid of the Eligibility section of the Benefit Definition.
One final note about Benefit Definitions for participants whose status is vested-as-active: typically, you will want to specify that any statutory maximum benefit limit should not be applied. This is for two reasons. First, if you do not make this specification and then you default the Valuation Salary to $0 (U.S. qualified mode) or service to 0 (Canadian registered mode), ProVal likely will apply a $0 maximum benefit limit (U.S. qualified mode) or ITA maximum pension (Canadian registered mode) and therefore produce a $0 plan benefit. Next, for calculating the U.S. Internal Revenue Code section 415 limit, ProVal does not know the participant’s termination date (after all, the record is being valued as active) and thus cannot freeze participation and service as of the termination date for purposes of computing the proration fraction to apply to the dollar limit and the average pay limit, respectively.
Liability Calculations
Because of the hybrid nature of the vested-as-active status, ProVal's liability determinations for these participants cannot adhere strictly to the methodology used for "true" actives. Specifically, under the "individual" active liability methods (i.e., the immediate gain recognition methods: projected unit credit, unit credit and entry age normal), ProVal sets the liability equal to the present value of future benefits (based on appropriate assumptions), rather than to any liability that would otherwise be attributed under the particular liability method, and it ignores (i.e., does not store) the normal cost. (Most likely, the benefit for vested-as-active participants is a frozen accrued normal retirement benefit stored in the database and multiplied by an early retirement reduction factor and/or a lump sum factor. When that is the case, the projected unit credit and unit credit methods would not generate a normal cost in any case, but the entry age normal methods could.)
In the case of Canadian solvency liabilities, there is no need for ProVal to modify the liability calculation. ProVal simply calculates the solvency liability in accordance with the user’s parameterization and then sets the solvency normal cost value to zero. Note, however, that special consideration is required if annuity purchase liabilities are calculated. ProVal will determine which solvency liability type (transfer value, immediate annuity or deferred annuity) to assign to vested-as-active participants, based on the “annuity purchase interest rates” criteria for active participants, which is specified as an age/service/points eligibility condition. If you want the determination for the vested-as-active participants to be based on the inactive parameterization, which is specified as an "age only" condition, and that eligibility differs from the active eligibility, then a separate run for the vested-as-active participants probably will be required.
ProVal recognizes that employee contributions are not currently being made for vested-as-active participants. Thus, if the coding of a Contribution Definition does not, in itself, de-select these participants, ProVal will zero out the employee contributions and any associated refunds of employee contributions and issue a warning. An associated refund for a vested-as-active participant's past employee contributions in the plan (if any) may be valued by means of a separate Benefit Definition.
In a forecast, a change in vested-as-active participant liability caused by a Plan Amendment entered in the Projection Assumptions of an underlying Core Projection will be amortized as an experience gain or loss, not as a plan amendment base.
Also note that any deferral period COLAs will be ignored for vested-as-active participants.
Output
In a Valuation or Core Projection, the output for vested-as-active participants is stored as vested inactive output. You can see the total liability for these participants by choosing to view your Valuation or Core Projection inactive output by status code (behind the Details button of the Output Variables dialog box). The detail by decrement or by Benefit Definition is not available, although these detailed results may be viewed by running vested-as-active records under the Sample Lives command of the Valuation or Core Projection. The detail for the vested-as-active status is also not available separately from the detail for the “Vested” status in Valuation Set or Deterministic Forecast output, where results for these two statuses are simply added together in the Inactive Vested category.
Gain / Loss Analysis
If some participants are valued using the vested-as-active ProVal status, their liability gain or loss will be calculated as if they were active but included in the vested participant gain/loss. In the “status reconciliation for gain/loss”, these participants will be identified as Vested, consistent with the Valuation results status counts.
For participants who were assigned the vested-as-active status at the beginning of the period and who have no liability at the end of the period, ProVal's "guess" as to the cause of decrement will be death (with active member mortality as the relevant decrement assumption). As with other circumstances when ProVal's guess may not be the desired option, you can specify a different cause of decrement for vested-as-active participants who have no liability at the end of the period by having a distinct end-of-period status for these participants and coding the Non-Participating Statuses topic of your Gain/Loss library entry accordingly.
Nondiscrimination Testing (U.S. qualified mode)
A participant valued using the vested-as-active ProVal status is considered an inactive participant for purposes of the calculation of accrual rates for nondiscrimination testing. Thus the participant is excluded from calculation of accrual rates in the U.S. Nondis. Accrual Rates tool and no record will be produced for that participant in the individual results output database file that this command creates.
Data Screening
ProVal’s Screen Data command will apply the active data tests to any participants parameterized (according to the referenced Census Specifications) with the vested-as-active ProVal status code. Parameters for Custom Tests need to be entered by the user, however, if they are to be used for vested-as-active records, bearing in mind that this is really inactive data. For example, because the inactive test "same status, annual benefit amount changed" will not apply to these participants, the user can define a custom test to determine whether the participant’s normal retirement benefit has changed.
ProVal will recognize the vested-as-active status code under the Status Changes topic of the Screen Data command and suggest appropriate "illogical status changes" for it. Note that ProVal can screen for illogical status changes even if the vested-as-active status is used only in your current year's Census Specifications, as long as the same census database status field is referenced in each year's Census Specifications.
Output Differences
There are some other situations where the vested-as-active calculations will not be able to produce the same output that would be produced if those vested participants were valued in the traditional manner. The known situations are with respect to Annuities in Receipt/Deferred versus Annuities Inforce, inactive life expectancy and ad hoc COLAs.
In the case of Annuities in Receipt/Deferred and Annuities Inforce, the situations where the output may be different from the output obtained if those vested participants were valued in the traditional manner are typically situations that most users would not choose to code. For example, if these participants are assumed to decrement with a deferred payment form (i.e., with no expected benefit payments in the year of decrement), the value of “annuities deferred” will not be captured during a Valuation because the valuation has only “expected benefit payments” available, which are the benefit payments expected to be made during the year beginning on the valuation date; thus these are $0 for deferred annuities. A Core Projection calculates more information about decrementing actives, however, and will have a more reasonable value for “annuities deferred”.
For the Distribution of Inactive Benefits exhibit, available under the Valuation Set Exhibits command, inactive benefit amounts generally will differ for vested terminated participants when they are valued as active members rather than as inactive members. This is because the benefits in force are determined by the Benefit Definition amounts when they are valued as actives, and these will typically be reduced by an early retirement reduction factor or use a different lump sum factor. In addition, all Benefit Definition amounts will be summed. This will result in double-counting if a non-$0 termination benefit is specified for the vested-as-active participants.
Generally speaking, the vested-as-active calculations are designed such that if the same benefits, valuation assumptions and commencement assumptions are used to value specified vested terminated participants’ benefits, either by means of the inactive vested terminated ProVal status or by means of the vested-as-active ProVal status, the valuation output will be identical. However this objective is not perfectly met with respect to the inactive life expectancy calculation. For participants valued with an inactive vested terminated ProVal status, ½ year is added in the year of death (i.e., deaths are assumed to occur in the middle of the year). If the vested-as-active ProVal status is used, during the period prior to attaining the 100% retirement age, the ½ year is not added in the year of death (i.e., deaths are considered to occur at the beginning of the year).
Finally, a small discrepancy can arise during a forecast when ad hoc COLAs are valued only for participants in pay status. This is because the division of the liability between pay status and deferral status is slightly different for these participants when they are valued as active participants versus when they are valued as inactive participants.