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Liability Methods - Funding

In the U.S. qualified mode of operation, for a “PPA” law selection, this topic is replaced by the Liability Methodology topic, which contains some of the parameters typically found under the funding Liability Methods topic (discussed below); the remaining parameters typically found under the funding Liability Methods topic are contained instead, for this law type, under the Actuarial Liability topic.

There is no funding Liability Methods topic in the German pension mode, but many funding Liability Methods parameters do apply in German mode and are available under the Additional Liabilities topic.

In the pension modes, see also Liability Methods - Accounting.

The Liability Methods topic of funding valuation assumptions allows you to select the liability method(s) needed to support actuarial cost method calculations to be performed by the Valuation Set (or Deterministic Forecast or Stochastic Forecast) that includes the Valuation (or Core Projection) referencing this set of Valuation Assumptions. The Liability Methods topic also specifies methodology details that “fine tune” the calculations under liability methods for funding valuations (including valuations as of forecast dates in a Core Projection).

In the universal pension mode, this topic provides a parameter (discussed at the end of this article) for obtaining results interpolated to exact age on the valuation date (instead of basing calculations on the participant’s age nearest birthday, as is done in all other ProVal modes of operation).

For the “PPA” law selection in the U.S. qualified mode, the Liability Methods topic parameters that are found under the Liability Methodology topic pertain to employee contribution timing and to some methodology elements of calculations under the projected unit credit and unit credit cost methods. Projected unit credit and unit credit calculations are generated automatically (no user selection of the projected unit credit or unit credit liability methods is required), as is calculation of present value of future benefits (PVFB), whereas no other liability methods are needed to produce target liabilities for the “PPA” law choice, although you may tell ProVal, under the Actuarial Liability topic, to produce additional liabilities (including liabilities under an entry age normal liability method). Therefore, the Liability Methodology topic furnishes (besides the employee contribution timing parameter) only those liability method parameters that are relevant to providing details for projected unit credit and unit credit liabilities. The employee contribution and projected unit credit / unit credit parameters are discussed in separate sections of this article (below).

For other U.S. qualified mode law selections and in other modes, you can choose from up to five basic families of liability methods. Select one or more to process under the Check which methods to run parameter. Be sure to choose all methods that will be required for later calculations. If you are contemplating a cost method change in the current year Valuation, select the liability methods needed for both the present and proposed cost methods. The choices are:

If you need cost method calculations for entry age normal, aggregate, individual aggregate (not applicable to German and U.K. modes) or a frozen initial liability method (the actuarial cost method is selected under the Contribution Policy topic of the Asset & Funding Policy), then select an entry age normal liability method, regardless of whether a frozen initial liability is determined under the projected unit credit cost method (FIL with PUC), under the (traditional or) pure unit credit cost method (frozen attained age) or under the entry age normal cost method (frozen entry age). In general, for cost methods that spread normal cost as a level percentage of salary, you would choose “Entry Age Normal (EAN) – Level % of salary”, although “Attained Age – Level % of salary” might be appropriate (see the Technical Reference article entitled Attained Age – Level % of Salary cost method for details). For cost methods that spread normal cost as a level amount per participant, choose “Entry Age Normal (EAN) – Level dollar”. If you need cost method calculations for an aggregate attained age method, then select the projected unit credit liability method. 

In all modes except the German and U.K. pension modes, there is an Individual Aggregate button that becomes accessible if you have selected an entry age normal liability method. If your valuation is performed under the individual aggregate cost method, click the button to specify the asset allocation basis.

In Canadian and Public modes, check Calculate Non-Indexed liability and select the liability to use. The non-indexed liability is determined using the selected cost method, but with all COLA assumptions set to zero. In Canadian mode, this is useful if basing the provision for adverse deviations on the non-indexed liability. 

A single funding valuation in ProVal can process several liability methods simultaneously, if desired, and generate various liabilities and normal costs. However, particularly if you are running a Core Projection, be mindful of the fact that the more liability methods you select, the longer it takes to process the Valuation or Core Projection.

Depending upon your selection of liability methods, additional parameters become accessible to further define your approach. These parameters are discussed in (the following) separate sections of this article, about:

as is the age interpolation parameter of the universal pension mode.

 

Entry Age Normal (EAN) Liability Methods (Only) Parameters

If you select an entry age normal liability method, then the EAN funding span for each benefit and EAN employee contribution methodology parameters become accessible.

The EAN funding span for each benefit parameter indicates the last age for which a normal cost will be generated for an active participant:

For example, if a participant is eligible to retire at age 55 but all participants are assumed to retire at age 65, then the first method would generate normal costs for all benefits through age 64. The second method would generate normal costs for the retirement benefit through age 64 but would generate normal costs for a termination benefit only through age 54.

The EAN employee contribution methodology parameter indicates the methodology for determining the employee portion, and thus the employer portion, of the total normal cost:

For details about calculations under these options, see the Technical Reference article entitled “Employee contribution methodology”.

The EAN historical salaries for PVFS at entry parameter pertains to the "Level % of salary" variation and indicates what salaries are used for years prior to the current year to calculate the Present Value of Future Salaries (PVFS) at entry age. This option does not affect the calculation of PVFS at attained age (i.e., at the valuation date), because it determines salaries only prior to the valuation date.

If you are operating in Universal Pension or Canadian Pension modes, you may elect to apply the average entry age normal technique under the entry age normal liability method. To do so, select an entry age normal liability method and check the Apply average entry age normal technique box. For this approach, one or more participants deemed to be typical must be specified. Clicking the Parameters button to access the Average Entry Age Normal Parameters dialog box, allows you to indicate the selection criteria for the typical active participants and the database file containing those participants’ data. You may also specify an expense allowance which is applied when the EAN Level % of Salary method is used. Specifying a non-zero expense allowance results in three additional valuation (or core projection) output items:

For more information, see the Technical Reference article on the Entry Age Normal cost method.

PVFS, PVFL, Valuation Salary and Valuation Number Parameters

Select a Salary Definition to be used for PVFS, valuation salary & total salary. Select <Salary> to use the same salary definition specified in the Active Data topic of Census Specifications.  PVFS and valuation salary are used in the Entry Age funding method and are always available as funding Valuation & Core Projection output items.  Total salary is available as an output item.  

You may apply limits to the PVFS and valuation salary. 

You may set the assumed Timing for PVFS, PVFL, valuation salary & number to “Beginning of year”, “Middle of year”, “Middle of year, except survivorship at end of year” or “End of year”. PVFS (present value of future salary) and PVFL (present value of future working lifetimes) are affected at both current age (age on the valuation date) and entry age (for entry age normal cost method calculations). Typically, PVFS, PVFL, valuation salary and valuation number are computed in ProVal as of the beginning of the year (regardless of decrement timing). However, you may discount each year’s salary (for PVFS and valuation salary) and service (for PVFL and valuation number) from an assumed payment date at the middle or the end of the year for interest and survivorship to the beginning of the year. You may also increase each year’s salary, according to your salary increase assumptions (salary scale), to get a projected value at the middle or the end of the year. In U.K. mode, this parameter will be applied to the calculation of the present value of salaries over the control period, which is calculated in the same manner as for PVFS except that salaries are included only for the control period years.

Selecting “Middle of year, except survivorship at end of year” may be desirable if 1) liability decrements are assumed to occur at the beginning of year, so that only the portion of each person who survives the decrements will generate a salary or be considered in the headcount for purposes of calculating PVFS, PVFL, valuation salary and valuation number, 2) salary increases are expected to occur in the middle of the year and 3) salary is paid continuously throughout the year, causing the desired interest adjustment to be, on average, middle of the year. If you select a timing option other than beginning of year, check boxes become accessible to specify an interest discount, a survivorship discount and/or a salary increase. If no adjustments are selected, the calculation will equal the beginning of year option. Similarly, if “Middle of year, except survivorship at end of year” is selected, you must specify an adjustment for survivorship as well as an adjustment for interest and/or salary in order to obtain the results intended by this option.

Note that valuation salary and valuation number are adjusted, as indicated above, because their values are included in the valuation date value of PVFS and PVFL, respectively; valuation salary and valuation number are the first year values in the summation of all future years’ salaries and service. Likewise, because PVFEC is not adjusted for the timing indicated for the salary adjustment parameters, the current year expected employee contributions (EEC) value, which is the first year value in the summation of all future years’ expected employee contributions, is not adjusted for the indicated timing.

Also, if both funding and accounting assumptions are included in a Valuation or Core Projection, the values displayed for the Valuation Salary and Valuation Number output variables will reflect (the funding) adjustment for these parameters. In the U.S. public mode, the separate accounting parameter settings are applied but if both funding and accounting assumptions are included, the funding values of Valuation Salary and Valuation Number will be displayed in output (for PVFS, however, there is a separate accounting output variable). In other modes, which do not have separate accounting parameters, the funding parameter settings will be applied to the accounting run if funding assumptions are included, but cannot be applied in an accounting run (of course) if funding assumptions are not included. Therefore, for “accounting only” runs, except in U.S. public mode, the timing used for valuation salary and valuation number is “Beginning of year” and, in the U.S. qualified mode, the IRC section 401(a)(17) limits are not applied to compute valuation salary. To see the accounting value of these output variables (i.e., without adjustment for timing and the compensation limit, or in public mode reflecting the accounting parameter settings), you need to view output for a Valuation or Core Projection in which you have set the funding assumptions to “<none>”.

 

Projected salary and head count in Output

The Projected salary & headcount based on parameter allows you to set the basis (“total” or “valuation”) for Valuation output for projected salaries and projected head counts (these variables are available on the Projected Benefits tab of the Output pane and by selecting the “Projected Headcount and Benefits” category when you access output by clicking the Valuation’s View button). If you select “total salary and number”, the head counts and salary values are for all active employees processed (i.e., not excluded by the Selection Expression behind the Census Data button of the Valuation); if you select “valuation salary and number”, the head counts and salary values are determined by:

 

Timing of Employee Contributions Parameter

In the pension modes (except German mode), for a plan with ongoing employee contributions, the Timing assumed for Employee Contributions parameter allows you to select when, for purposes of calculating the offset to (total) normal cost to produce the employer normal cost, employee contributions are assumed to be paid. You may set the assumed timing to “Beginning of year”, “Beginning of year, except survivorship at end of year”, “Middle of year”,  “Middle of year, except survivorship at end of year”, "Same timing as selected for PVFS, PVFL, valuation salary and valuation number adjusted for decrement timing" (available in funding and U.S. public mode accounting assumptions), or "Same timing as selected for PVFS, PVFL, valuation salary and valuation number" (only available in U.S public mode).

See the Technical Reference article entitled “Employee contribution methodology ” for details of the calculations used for discounting employee contributions for interest and survivorship.

Note that the contribution timing setting affects the values of projected employee contributions when viewed on the Projected Benefits tab of the Output pane or by selecting the “Projected Headcount and Benefits” category when you access output (by clicking the Valuation’s View button).  This parameter is also used to project employee contribution account balances when automatic refunds of employee contributions are payable.

 

Projected Unit Credit, Unit Credit and Attained Age Liability Methods Parameters

In the universal pension mode, the UC career average components disregard future indexation check box is accessible if the unit credit cost method is selected. Checking this box assures that unit credit calculations for career average components will disregard indexation after the valuation date, thus producing the same liability and normal cost for career average components with indexing applied (typically used for pension plans in the Netherlands) as if there were no indexation applied after the valuation date.

In the pension modes, if you select the attained age liability method (not available in the U.S. qualified mode) or the projected unit credit liability method, the check boxes entitled PUC benefits never less than UC Benefits and PUC equal to UC for cash balance and career average components become accessible in the Liability Methods dialog box. (The corresponding check boxes, entitled Benefits with expected increases (PUC) never less than without (UC) and PUC equal to UC for cash balance and career average components, are always accessible in the Liability Methodology dialog box.)

To compute projected unit credit liabilities, if you wish to set projected benefits at all decrement dates at least as large as the projected benefits under the unit credit cost method, then check the PUC benefits never less than UC benefits box or the Benefits with expected increases (PUC) never less than without (UC) box. This ensures that the value of projected benefits inherent in projected unit credit calculations is not less than the value inherent in unit credit calculations. For most plan designs, this choice will not affect the results. When the parameter does matter, usually for cash balance plans, it avoids counterintuitive results, by inflating the accrued benefit underlying the projected unit credit liabilities.

Checking PUC equal to UC for cash balance and career average components ensures that projected unit credit liability values will be set equal to the values produced by the unit credit cost method for cash balance and career average components if the benefits are attributed according to accrual rate proration, as selected for attribution of each Benefit Definition.

The parameter to Reflect new accrual rates during the valuation year in liabilities is available only in the U.S. qualified mode, for a “PPA” law selection. If this box is checked, all UC and PUC calculations will honor benefit changes entered under the New Rates as of button of the Accrual Rates topic (of an accrual definition Component type of Benefit Formula Component) that are both effective during the year beginning on the valuation date and are applicable to All years. This parameter applies only to Accrual Definitions with a Final average Accrual format. It affects the calculation of funding target and maximum tax deductible target liabilities as well as UC and PUC actuarial liabilities, but does not affect any vested liabilities. Specifically, these liabilities will reflect dollar multiplier changes effective during a plan year as if they were effective on the first day of the plan year.

For example, consider a plan (calendar year plan year) with a monthly dollar multiplier of $10 per year of service. The plan is amended effective 7/1/2010 to provide a multiplier of $11 for all years of service. If the Reflect new accrual rates during the valuation year in liabilities box is checked, then, for purposes of determining the aforementioned liabilities as of 1/1/2010, the $11 benefit multiplier will be used for any accrued benefits payable after the effective date of the amendment.

Another pension mode parameter specifies the PUC & UC Attribution Service (i.e., for attribution of benefits for unit credit and projected unit credit liabilities) when the attribution method is Linear Proration to Decrement or Linear Proration to age x, as selected for attribution of each Benefit Definition, to define service for the proration fraction that is applied to a projected benefit to get the corresponding accrued benefit. Note that this parameter is used in the U.S. qualified mode to determine attribution service for calculating target liabilities, current liabilities and PBGC variable premium liability (as appropriate for your law selection), even if the unit credit liability method has not been selected; therefore, the PUC & UC Attribution Service parameter is accessible in the U.S. qualified mode regardless of liability method selection, although this parameter is accessible in other modes only if you select the pure unit credit, projected unit credit or attained age liability method.

Service for Linear proration to decrement or Linear Proration to age attribution may be specified by either a database Field or a Service Definition. If a field is used, it may be either a service start date or a numeric field containing service as of the valuation date. Select the desired field from among the numeric and date fields unhidden in the current Project or, if you need fractional service attribution (e.g., hours-related service) or rounding (e.g., completed years), select from the library of Service Definitions. The button accesses the library to create and modify Service Definitions.

(In OPEB mode, attribution service for the linear proration to decrement method is specified under the Plan Attributes - OPEB mode topic of the Plan Definition.)

In the U.K. pension mode, specify the PUC & UC Normal cost control period, which defines the number of years, after the valuation date, represented in (or covered by) the projected unit credit and/or unit credit normal cost (typically 1 year).

 

Term Cost Method Parameters

The term cost method is available in the pension modes, although not commonly used in the U.S. qualified pension mode. (If you are operating in the U.S. qualified mode, you may wish to consider whether use of this cost method is reasonable. For guidance, see IRC Sec. 412 regulations and any other relevant guidance.) The term cost method, typically used for pricing such ancillary benefits as disability and/or pre-retirement death benefits, calculates the liability expected to be incurred during the year beginning on the valuation date (current year) only. In other words, it represents the probability that an individual will decrement during the current year, with a benefit payable (either immediately or deferred), multiplied by the benefit’s present value on the valuation date. A benefit selected for term cost is excluded in the determination of liabilities and normal costs under the selected actuarial cost method, because the term cost itself is the plan’s normal cost for this benefit.

In all pension modes except U.K., click the Term Cost button to access the Term Cost Benefits dialog box, in which you select the plan benefits to value under the term cost method.

In the U.K. pension mode, check the Term Cost specific benefits box and then click the Benefits button, to access the Term Cost Benefits dialog box and select the plan benefits to value under the term cost method.

The Term Cost Benefits dialog box lists each Benefit Definition unhidden in the current Project (except for Benefit Definitions initiated by the “employee contributions contingency”). To select term cost, double-click in the Term Cost column next to the name of the appropriate Benefit Definition. “Term Cost” will appear in this spot to indicate that the term cost method will be used to value this benefit. To clear selection of the term cost method for a Benefit Definition, double-click again: “Term Cost” will disappear from this spot and the actuarial cost method will be used to value this benefit. Any number of Benefit Definitions may be selected for term costing.

If you wish, you may select a Plan Filter (in German mode, a Promise Filter), from the dropdown list, to reduce the list of possible choices to those Benefit Definitions associated with a particular Plan Definition. Please see Filters for details.

Notes regarding active participant liabilities for benefits valued under the term cost method:

  1. If you value a benefit under a selected actuarial cost method and then switch to the term cost method, you will see a decrease in the values of the actuarial liability (under the selected actuarial cost method) and the present value of future benefits (reflecting an absence of a liability because the benefits instead are valued under the term cost method),specifically in the

This is a consequence of the absence of a “true” actuarial liability for these benefits, that is, the entire benefit cost is the current year’s term cost (which is added to the normal cost for benefits valued under the actuarial cost method to derive the total normal cost for all plan benefits).

  1. If you value a benefit under a selected actuarial cost method and then switch to the term cost method, you will see no change in the value of the following specialized liabilities:

This reflects inclusion of all benefits in these specialized liabilities.

 

Universal Pension Mode Parameter

An Interpolate results to exact age check box is available in the universal pension mode. If this box is not checked, ProVal will use the participant’s age nearest birthday on the valuation date (that is, the age on the birthday nearest the valuation date), as is done for calculations in other modes. If this box is checked, ProVal will make two passes for each participant (one pass as if the participant’s age on the valuation date were his/her age on the last birthday coincident with or preceding the valuation date, another pass as if the participant’s age on the valuation date were his/her age on the next birthday following the valuation date) and interpolate the two sets of results to the participant’s exact age on the valuation date. For details, see the Technical Reference article entitled Interpolate results to exact age.