Benefit Definitions - pension modes

A Benefit Definition pulls together all the information about a specific benefit that is to be included in a pension plan or, in the German pension mode, in a Benefit Promise. The Benefit Definition determines why, when, how much and in what form payments will be made, as well as how the benefit is to be included in the liabilities.

Name is a text field in which to enter a description of the benefit. This may be any descriptive phrase, including spaces.

All other parameters of the Benefit Definition dialog box are grouped into sections that, generally, can be expanded, or compressed, by a click on the arrow (if one is provided) to the left of the section’s heading. The sections, discussed below in separate parts of this article, are:

Status & contingency initiating benefits (Contingency initiating benefits in U.K. mode)
Payment forms (Payment form in German mode)
Eligibility
Benefit formula (Benefit tranches in U.K. mode)

Status & contingency initiating benefits

This section, entitled Contingency initiating benefits in U.K. mode, pertains to the nature of, or the cause of, the benefit: a decrement from active status, a benefit paid while active, or a benefit applicable to a participant who has already terminated from active status but not yet commenced payment.

In all modes except U.K. mode (and German mode for benefits initiated by the termination decrement), this section defines which ProVal statuses the benefit Applies to. Select Actives, Vested valued through actives (Terminated vesteds in German mode) or both.

Note that in the German pension mode, #NormToNRB operators will be disregarded for current Actives. (See #NormToNRB for further information.) Also, when included in Pension promises, benefits for Actives apply to current actives both before and after assumed termination. Thus, for current actives, the retirement, death and disability contingencies will be applied both before and after the termination decrement; these three contingencies will be considered “second decrements” for post-termination benefits.

Contingency is the decrement (i.e., event causing a status change) that would trigger payment of this benefit – “Retirement”, “Termination”, “Death” and “Disability” – or “In-Service”, to indicate a benefit payable to a plan member while in active status. If the benefit is payable only to "Vested valued through active" participants, the available contingencies are "Retirement", "Termination (Alt. vested benefit)" and "Death." An alternative vested benefit initiated by termination need be specified for vested valued through active participants only if you wish ProVal to calculate a vested funding liability different from the liability calculated according to the retirement benefit parameter settings (vested accounting liabilities and U.S. qualified mode vested current liability, however, will be set equal to the total liability, which is based on the retirement benefit).

If the Contingency initiating the benefit is “Death”, select whom the benefit is payable to: “Everyone”, “Married only” or “Single only”. These options allow you to restrict receipt of the death benefit according to assumed marital status and thus, perhaps, exclude part of the liability calculated for this benefit from plan liabilities. If “Everyone” is selected, 100% of the liability calculated for this benefit is included in plan liabilities. If “Married only” is selected, ProVal will value this death benefit by applying the percentage of the active population assumed married to the liability otherwise calculated for this benefit, which percentage is specified under the Other Valuation Parameters topic of the Valuation Assumptions command. If “Single only” is selected, ProVal will value this death benefit by applying the complement of the percentage of the active population assumed married to the otherwise calculated benefit liability. For example, if 80% of male and female employees are assumed married, then ProVal will include in plan liabilities 20% of the liability it calculates for this (single plan member) death benefit. Regardless of whether the death benefit is for married, single or all members, the age of the beneficiary is determined by the age difference specified under the Other Valuation Parameters topic (unless specified for active participants on the database record) and the beneficiary is assumed to be of opposite sex.

Check the Election Probabilities apply box if the benefit is not automatically paid out in the event indicated by the Contingency. Election probabilities are commonly used to value, for example, x% of participants electing an annuity form of payment and (100-x)% electing a lump sum, as might be a typical valuation assumption for a cash balance plan. In this situation, you may specify a normal payment form that is, let’s say, a life annuity and define a lump sum optional payment form. Alternatively, you may define two benefits, one to compute a lump sum amount and one to compute the amount of each annuity payment. Under either alternative, the assumed election percentage for each payment form must be entered under the Valuation Assumptions command. Note that this box must be checked if any optional form is associated with (defined for) this benefit.

Payment forms

This section, entitled Payment form in German mode, defines the Normal form and (except for German mode) Optional forms upon which the benefit may be paid. Optional payment form values are based on the defined Benefit formula, with conversion of the benefit amount from the normal form defined in the Valuation Assumptions; further adjustment, if needed, can be accomplished with separate Benefit Definitions.

Select the Normal Form from the Payment Forms that you have already defined (and unhidden in the current Project) or create a new one. To modify or create a Payment Form, click the button. Note that if the specified Normal form is of the Life Insurance or Post-Decrement Death Benefit type, optional payment forms will not be permitted for the benefit.

In pension modes other than German or U.K., if the Benefit Definition is initiated by the termination Contingency there is a Parameters button for Post-termination retirement. This button is accessible only if the normal payment form commences at post-termination retirement age. See P ost-Termination Retirement Parameters for more information.

The remaining parameters of this section relate to optional payment forms, and to commutation in U.K. mode, and are discussed in the Optional Payment Forms article.

Eligibility

This section defines the basic requirements (such as age, service or points) for receipt of the benefit. (Election probabilities, discussed above, may further restrict receipt of the benefit.) See Eligibility Requirements for details about the parameters.

Benefit formula

This section, entitled Benefit tranches in U.K. mode, defines the amount of the pension benefit and how it is to be included in the liabilities.

In all pension modes, see Benefit formula for details about coding the amount of the benefit in the expression box (in U.K. mode, the Benefit formula for box, below the tranche spreadsheet, displays the formula expression for the benefit currently selected in the tranche spreadsheet) and using the Component Library button, which provides access to the Benefit Formula Component Library. In the U.K. mode, see Benefit tranches for details about entering selections for the tranche spreadsheet, as well as using the Table Library button, which provides access to the Benefit Component Table Library.

In all pension modes, see Attribution for details about the parameters behind the Attribution button, which pertain to how the benefit is attributed for various unit credit and projected unit credit liabilities (including, in the U.S. qualified mode, PPA liabilities). The attribution button is not available when the Benefit Definition applies exclusively to vested valued through active participants per the Status & contingency initiating benefits section.

In modes other than German pension and U.K. pension, for benefits other than those initiated by the “In-Service” Contingency, the Include in vested liabilities box allows you to indicate that a liability for this benefit should be included in vested ABO, vested ASC 960 liability, vested PBGC liability, vested current liabilities, multiemployer vested liability and vested target liabilities. For U.S. qualified plans, it is typical to include retirement and termination benefits in vested liabilities, whereas disability and death benefits typically are included at the discretion of the actuary. See Vested liability calculation for details about ProVal’s methodology for calculating vested liabilities.

In the German pension mode, check the Adjust for state pension contributions box to reflect state pension contributions attributable to this benefit. The state pension contribution rates to be reflected are entered under the Regulatory Data topic of the Valuation Assumptions. See State Contribution Adjustment for technical details about ProVal’s methodology for this calculation.

Also in the German pension mode, check the Include in Tax (Teilwert) Liability box and/or the Include in PSVaG Liability box to indicate that a liability for this benefit should be included in these liabilities. See Teilwert and PSVaG Liability calculations for technical details about ProVal’s methodology for calculating this liability.

In the U.S. qualified and U.S. public pension modes, the Apply 415(b) maximum benefit limit check box asks if the Internal Revenue Code (IRC) section 415(b) benefit limits apply to this particular benefit. If you check this box, the Adjustments button becomes accessible; click it to access the parameters for payment form adjustments (which adjust the 415 limit for optional forms) and plan reduction factors (which adjust the 415 limit for early commencement). The 415(b) benefit limit is applied to the normal form of payment. Optional payment form conversion factors are applied to the limited benefit. For more information about how ProVal handles 415(b) benefit limits, and for details about coding adjustment for the benefit’s payment form, see 415(b) Maximum Benefit Limit. If the box has not been checked, then the benefit is not limited and ProVal will not apply any of the limitations derived under section 415(b) to the benefit value derived under this Benefit Definition.

Although the Apply 415(b) maximum benefit limit box appears only in the U.S. qualified and U.S. public modes, IRC section 415 limits are available through use of the #MAXBEN operator in all modes of operation. Additionally, in U.S. qualified and U.S. public modes, it may be necessary both to apply the #MAXBEN operator to the normal retirement benefit and to Apply 415(b) maximum benefit to the benefit at commencement.

In the Canadian registered pension mode, the Apply ITA maximum pension check box asks if the service-related dollar limit to a pension under the Income Tax Act (ITA), including early retirement reductions to that maximum pension limit, applies to this particular benefit. Check the box to limit the benefit and have ProVal apply the service-related dollar limit, with adjustment for early retirement. If you check this box, the Adjustments button becomes accessible; click it to access the parameters to adjust the ITA maximum pension for payment on a form requiring adjustment under statute (and any other relevant published guidance). For more information about how ProVal handles the ITA maximum pension, and for details about coding adjustment for the benefit’s payment form, see ITA Maximum Pension. If the box has not been checked, then ProVal will apply no ITA limit to the benefit value derived under this Benefit Definition.

Note that although the Apply ITA maximum pension box appears only in the Canadian registered mode, the ITA maximum pension limit is available through use of the #CANMAX operator in all modes of operation.

In modes other than German pension and U.K. pension, for Benefit Definitions that apply to actives, the Use alternative formula for EAN Normal Cost check box allows you to calculate, under an entry age normal cost liability method, the normal cost using a different formula from that used to calculate present value of future benefits. If you check this box, the Formula button becomes accessible; click it to access the expression box, in which you enter the Formula to be used to calculate normal cost, and the Component Library button, which provides access to the Benefit Formula Component Library. See Benefit Formula for EAN Normal Cost for more information, including coding details.

In all pension modes except U.K., the Apply COLAs from assumptions check box allows you to specify a cost-of-living adjustment for this benefit (that is, an increase in the benefit amount for years after the year of decrement). If you check this box, the COLA Limits button becomes accessible; click it to access the parameters that define the COLA amount. See Cost-of-Living Adjustments (COLAs) for details.

In German mode, check the Apply divorce offset box to apply either the <primary> or the <secondary> divorce offset, as specified in the Census Specifications to the Benefit Definition. See Active Data and Terminated Vested Data for more details on the calculation if a divorce offset is applied.

In Canadian mode, check the box to Include in calculation of excess contributions if you would like this benefit definition to be included in ProVal's automatic calculation of excess contributions. See the technical reference article Canadian excess contributions for more details.

In Universal pension mode, check Value as a funding reserve to only include this benefit definition in funding liabilities and exclude it from all accounting and experience liabilities. This type of reserve is common in Switzerland.