Increase & Crediting Rates
In the OPEB mode of operation, this dialog box is entitled “Increase Rates”. “Crediting Rates” refers to cash balance Accrual Definitions and employee contribution refunds which are not found in OPEB mode.
(Note: The following discussion applies to all topics other than the Contract Renewals topic in German mode. For that topic, see the section below titled Contract Renewals.)
This topic allows you to specify low, medium and high levels of (general) inflation and, optionally, low, medium and high levels of an alternate benchmark over the projection period. Each of these inflation environments, or alternate benchmark environments if selected for cash balance, pension equity, COLA, employee contribution, or new entrant asset transfer crediting rates, are then linked to the assumed values of:
experience (actual) salary inflation
experience increases in U.S. regulatory items: §415(b) maximum benefit; §401(a)(17) maximum compensation; Social Security wage base; Consumer Price Index (CPI) increase,
experience increases in Canadian regulatory items: ITA maximum pension, yearly maximum pensionable earnings
experience increases in German regulatory items: German Average Income, Current Pension Value, Healthcare BBG
experience increases in U.K. regulatory items: Consumer Price Index (CPI), Retail Price Index (RPI), Section 148 Orders, Lower Earnings Limit (LEL)
the associated experience increase or crediting rates for Benefit Formula Components to which you have applied increase or crediting rates. Cash balance components, universal pension mode career average components with indexation, and pension equity components may be specified as varying based on either inflation or the alternate benchmark.
the associated experience increase rates for Accrual Basis Components to which you have applied increase rates
in pension modes other than U.K., experience Cost-of-Living Adjustments (COLAs)
the associated experience interest crediting rates for Employee Contributions which have a refund benefit payable (which may be specified as varying based on either inflation or the benchmark)
in OPEB mode, the associated experience increase rates for Lifetime and Annual Limits to which you have applied increase rates
in pension modes other than German and U.K., the associated experience interest crediting rates for modified cash refund annuity active Payment Form Definitions and Inactive Payment Forms that have a deferral period for commencement of benefit payment.
the associated experience interest crediting rates for new entrant asset transfers (which may be specified as varying based on either inflation or the alternate benchmark
With this information about assumed actual increase rates, ProVal can use interpolation routines to determine the appropriate liability and cost levels for any inflation or alternate benchmark environment specified for a deterministic or stochastic forecast.
In the universal mode, (Belgium) insurance contracts are not included in the list, as you may not specify experience excess return crediting rates for these contracts directly; instead, ProVal applies the assumed valuation excess crediting rates for experience as well.
You are first asked to input a low, medium and high Inflation Environment, such as 2%, 4% and 6%. Note that these specifications serve both as “labels” and as interpolation assumption points. They are labels in that the actual increase in salaries and/or benefits (for the cost-of-living) will be determined based on your specified assumptions for each inflation environment (see below), so you may specify a 2% inflation environment but also specify, for example, that unit benefit increases will be 5% in this environment.
These environments are interpolation points in that if you, for example, specify that the 2% low inflation environment has 5% salary inflation and the 5% medium inflation environment has 7% salary inflation, ProVal will interpolate salary inflation under a 4% inflation environment, for example, to be approximately 6.33%, or the low salary inflation plus two-thirds of the difference from the medium salary inflation.
Next, if tying crediting rates for cash balance accrual definitions, Universal Pension mode career average components with indexation, COLAs, employee contribution refunds, or new entrant asset transfers to an Alternate Benchmark, input low, medium, and high alternate benchmark values.
ProVal will perform projections for all three inflation environments and if selected, all three alternate benchmark environments, and use interpolation routines to obtain the effects of inflation or an alternate benchmark at points within or even beyond these values.
For each environment, you are asked to specify the experience increase rates or, for cash balance accrual definitions, COLAS, employee contributions and modified cash refund annuity payment forms, crediting rates, for the items collected under the categories that appear in the Select a category single choice list field in the lower half of the dialog box:
Salary / Regulatory Items
Benefit Formula Components
Accrual Basis Components
Cost-of-Living Adjustments (COLAs) (pension modes other than UK mode)
Employee Contributions (pension modes other than German)
Lifetime and Annual Limits (OPEB mode)
Modified Cash Refund Annuities (pension modes other than German and U.K.)
Contract Renewals (German mode). See specific discussion in Contract Renewals section below.
The items in the choice list for all categories except salary/regulatory items, cost-of-living adjustments and modified cash refund annuities are automatically restricted by the Plan Filter selection. You can ignore items that do not apply to the pension plan in question, that is, items not referenced in your Plan Definition or, in a pension mode forecast, not referenced by a Plan Amendment. However, in the U.S. qualified and U.S. public pension modes, you must always provide increase rates (even if they are zero) for the IRC Section 401(a)(17) maximum compensation limit, regardless of whether you are doing a funding or an accounting valuation.
Specify an increase (or crediting) rate by clicking the name of an item. This leads you to a dialog box in which to specify low, medium and high increase (or crediting) rates that correspond to the low, medium and high inflation (or alternate benchmark if applicable) environment. When you enter these increase (or crediting) rates, you can specify either a static rate or rates varying by calendar year. Salary inflation rates can vary by coded field and calendar year. For cash balance accrual definitions, Universal Pension mode career average with indexation accrual definitions and employee contributions, specify whether the component should Vary based on inflation or the alternate benchmark. The note at the top of the dialog box detailing the applicable interpolation environment is automatically consistent with the chosen environment.
For details about coding the parameters for static and variable rates, see the discussion of Increase & Crediting Rates or the discussion of Cost-of-Living Adjustments (COLAs) for the Valuation Assumptions command. Coding is done in the same manner except that you enter three sets of values (instead of just one set, as is done for a Valuation Assumptions set).
Contract Renewals
In German mode, the Contract Renewals topic allows you to specify the timing of renewed contracts during the experience period. For each Benefit Formula Component with a contractual stop to allocations, select whether renewals occur: