Vested liability calculation
Vested liabilities (VBO, vested current liability, vested ASC 960 liability, PBGC premium liability, vested target liabilities and multiemployer vested liability), available in the U.S. qualified, universal and U.S. public pension modes, are calculated in ProVal as follows:
First, you must indicate whether or not each benefit is includable in the vested liability (designated as a "vested benefit" below) via a check box in the Benefit Definition. Any number of benefits (from none to all) under a specific decrement may be designated as "vested benefits" at the time the benefit is defined in ProVal. However, to calculate vested liabilities, at least one benefit initiated by the termination contingency must be designated as vested when the benefit applies to actives. If the benefit applies only to "Vested valued through active" participants, a benefit initiated by termination is not required unless you wish to value an alternate vested benefit.
Thus benefits designated as payable upon death from active status may be considered "vested benefits". This accommodates return of contribution benefits as well as other death benefits, which some actuaries value as vested and others do not.
While disability benefits may be specified as "vested benefits", this might be undesirable, especially in the U.S. qualified mode, and will significantly increase the time to process vested liabilities.
ProVal will determine which benefits each participant is “currently eligible” for. This determination is based on your setting for the Include benefits based on eligibility at parameter, which is found under the Liability Methodology, Current Liability or Liability Methods - Accounting topic, depending on the type of liability being computed. Under the “first decrement age“ option for this parameter, current eligibility is evaluated at the decrement age in the current year (year beginning on the valuation date), and this decrement age is based upon your timing selection (under the Decrements topic of Valuation Assumptions) for when active decrements occur. Thus, current eligibility is evaluated on the valuation date under a beginning of year decrement timing assumption and on the valuation date + 6 months under middle of year decrement timing. Under the “valuation date” option, current eligibility is evaluated at the valuation date, regardless of decrement timing.
Vested liabilities are always based on the accrued benefit value, with interest to the decrement date for cash balance components, regardless of how the unit credit benefits are attributed – i.e., vested liability is calculated using the accrual rate proration attribution method, reflecting any custom attribution rates specified for unit credit (except that Benefit Formula Components of the table type that have a service dimension, e.g., a graded vesting schedule, receive special treatment). This is consistent with ASC 715, which defines the vested benefit obligation as “the actuarial present value of vested benefits”. Vested benefits, in turn, are defined as "benefits for which the employee's right to receive a present or future pension benefit is no longer contingent on remaining in the service of the employer". Note that, as (discussed above) for eligibility, the accrued benefit is determined as of the valuation date if decrement timing is the beginning of the year but may be determined at either the valuation date or the decrement date if decrements occur at the middle of the year. If determined at the decrement date, the accrued benefit is as of the valuation date plus half a year, with salary and service frozen at the valuation date. Thus, the midyear accrued benefit will differ from the valuation date accrued benefit if the Benefit formula contains components whose value depends on age, such as age-based tables and lump sum factors.
If the participant is not currently eligible for any retirement benefits included in the vested liabilities, retirement rates are "added to" termination rates. That is, once retirement eligibility is met (on some future anniversary of the valuation date) retirement rates are applied to value the termination benefit -- not the retirement benefit. Therefore, if the termination Benefit Definition values the deferred normal retirement benefit but the retirement Benefit Definition values an immediate early retirement benefit, with early retirement reductions that are not actuarially equivalent to the normal retirement benefit on the valuation mortality and interest bases, then, for example, vested target liability will not equal target liability (even when graded vesting does not apply, so that the participant is 100% vested on the valuation date). In this example, to produce vested target liability equal to target liability, for purposes of vested liability computation (only – so a separate run is needed for vested liabilities), define the retirement and termination Benefit Definitions identically except for the contingency initiating the benefit: code both as either immediate early retirement benefits or deferred normal retirement benefits, depending on whether you consider the early retirement subsidy or penalty as vested on the valuation date, or not, respectively.
The phrase "added to" is in quotes because the value of benefits paid on annuity payment forms because of these retirements will incorporate the mortality table associated with retirement rates, not the mortality table associated with termination rates (if different). However, if the termination Benefit Definition’s Payment Form is a lump sum type, then the value of the underlying payment form of a lump sum factor Benefit Formula Component used in the Benefit formula of the Benefit Definition is based on the mortality basis applicable to active members after termination, not retirement, has occurred. This methodology is followed because, with the latter coding, the lump sum present value of the annuity is part of the benefit amount paid upon decrement, not part of the Benefit Definition’s payment form.
As long as there is at least one "vested benefit" retirement benefit formula for which the participant is currently eligible, that formula will be valued.
If no disability benefits are specified as "vested benefits", disability rates will be "added to" retirement rates if the participant is currently eligible for a "vested benefit" retirement benefit. That is, once disability benefit eligibility is met, disability rates are applied to value the retirement benefit. Otherwise, disability rates will be "added to" termination rates, i.e., disability rates will be applied to value the termination benefit.
The phrase "added to" is in quotes because the value of benefits paid on annuity payment forms because of these disablements will incorporate the mortality table associated with disability rates, not the mortality table associated with retirement or termination rates, respectively (so the rates can’t actually be simply added together). However, if the retirement or termination Benefit Definition’s Payment Form is a lump sum type, then the value of the underlying payment form of a lump sum factor Benefit Formula Component used in the Benefit formula of the Benefit Definition is based on the mortality basis applicable to active members after retirement or termination (respectively), not disablement, has occurred. This methodology is followed because, with the latter coding, the lump sum present value of the annuity is part of the benefit amount paid upon decrement, not part of the Benefit Definition’s payment form.
All eligibility conditions and exceptions are valued based on current age and service only (see the definition above of “currently eligible”). Thus, for example, retirement benefits for "55 & 10 but not 30" will continue to operate over all ages for a participant over age 55 with between 10 and 30 years of service currently and the complementary "30" formula will never be applicable.
Service will be frozen for evaluating all ProVal Benefit Formula Components, including table components, provided that the Lookup table values using projected age & service, except: parameter (accessed via the Advanced button) is set to the Freeze service for vested liabilities option. Thus, if early retirement reduction or vesting schedules, both of which are specified in ProVal as table components, are service-related, the vested liability calculation will reflect only the age-based values associated with service as of the valuation date. There will be no adjustment, however, to decrement rate reference tables that are service-related.
If there are any "vested benefit" active death benefits (or, less likely, disability benefits) for which the participant is currently eligible, their value will be included in vested liabilities.
If the participant is not currently eligible for any "vested benefit", the vested liability will be $0.
No vested liability normal cost is calculated.