Conversion Factors - ProVal 319

pension modes

This topic has two parts.

The first part allows you to set Interest and Mortality for Lump Sum Factor, Late Retirement, and Pension Equity components - the interest and mortality bases to be used by ProVal when computing the present value of lump sum Benefit Formula Components or when calculating the late retirement factors in late retirement components or annuity factors in pension equity components. (The present value is as of the decrement date, or as of a valuation date anniversary if a lump sum factor component is used in a Benefit Definition initiated by the in-service contingency.) Those items for which interest and mortality assumptions have not yet been assigned are flagged with an asterisk. To edit the interest and mortality bases for one or more components, highlight the component(s) from the list of lump sum factors and late retirement components defined in the current Project (or previously defined for a Valuation referencing either this Valuation Assumptions set or a set from which it was copied), click the Edit button, and complete the parameters in the next dialog box. These parameters are separated into up to three sections, dealing with the lump sum interest and mortality bases, and perhaps with determining a lump sum present value for legislated liabilities.

The second part allows you to specify Conversion Factors for Optional Payment Forms referenced in Benefit Definitions. Select a Payment Form Definition from the list of optional payment forms that exist in Benefit Definitions that are unhidden in the current Project. Those items for which a conversion basis have not yet been assigned are flagged with an asterisk. To edit the conversion basis, select the desired optional payment forms, click the Edit button, and complete the parameters in the next dialog box. There are two options to Convert from the normal payment form to the optional payment form:

The first option, Using specified Interest and Mortality, has the same parameters as for defining the interest and mortality bases for lump sum factors, except that there is only a single constant interest rate rather than separate pre-commencement and post-commencement rates.
The second option, Using plan factors from Benefit Component Table, allows you to select a table of conversion factors, in lieu of providing the interest and mortality bases for conversion. If this option is selected, choose a Benefit Component Table (from the list of tables unhidden in the current Project) that contains the desired conversion factors. The conversion factors will be multiplied by the normal payment form value to determine the value of the optional payment form. To modify or create a Benefit Component Table, click the button. Specify if the table values should be determined using a Table look up based on age at commencement or decrement. Note that for payment forms commencing at post-termination retirement age, the look up will always be done at commencement (retirement decrement).

For lump sum factors, the interest and mortality bases must be specified. For optional payment forms, the conversion factors must be specified; that is, either the interest and mortality bases underlying conversion must be provided or the (plan) conversion factors themselves must be provided, by reference to a Benefit Component Table that you select (from the library of tables unhidden in the current Project).

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 Lump Sum Factors and conversion factors for optional payment forms associated with a particular Plan Definition (or in German mode a particular Benefit Promise). Please see Filters for details.

The following three sections of this article (entitled Interest Rates, Mortality Rates and Legislated Liabilities) discuss the interest and mortality bases for lump sum factors and for optional payment forms, if the Using specified Interest and Mortality option is selected. Considerations that apply to certain legislated liabilities (defined below) are also covered, in the third section. Specifying an interest and mortality conversion basis for an optional payment form instructs ProVal to calculate two lump sum factors, one under the Normal form of the referenced Benefit Definition and one under the Optional form. The conversion factor is then calculated as the normal payment form factor divided by the optional payment form factor. The conversion factor is multiplied by the normal payment form value to determine the value of the optional payment form. The sections below use the terminology “lump sum” but apply to calculating both the value of a lump sum factor benefit formula component and the value of the two lump sum factors that comprise the conversion factor for an optional payment form.

Interest Rates

These parameters deal with selecting the Interest Rates used to determine a present value, at the participant’s decrement date, associated with the lump sum benefit payment.

Under a “PPA” law selection in the U.S. qualified mode, for Target and PBGC Liabilities, if you select the Use underlying liability interest rates option, ProVal will use

the funding liability interest rates when the optional form or lump sum factor is being calculated for use in a PPA funding liability,
the “max tax” liability interest rates when the optional form or lump sum factor is being calculated for use in a PPA “max tax” liability and
the assumed PBGC interest rates to value the PBGC variable rate premium liability,

in which case the interest rate assumptions specified under the Interest Rates topic and the PBGC Variable Premium Liability topic will be used for lump sum values for target (funding and “max tax”) and PBGC liabilities, respectively. This option is useful, in a funding Valuation or Core Projection, for determining Internal Revenue Code section 417(e) minimum lump sum present values when the intention is to use the valuation interest rates (whether these interest rates are segment rates or spot rates) without further adjustment.

In the Canadian registered mode, select the Use Ongoing Liability valuation interest rate option for funding assumptions if you wish to use the assumed valuation interest rate(s) to value lump sum payments, in which case the interest rate assumptions specified under the Ongoing Liability Interest Rates topic will be used.

Select the Use valuation interest rate option for accounting assumptions or Use underlying liablity interest rates for PPA funding assumptions in U.S. Qualified mode, if you wish to use the assumed valuation interest rate(s) to value lump sum payments, in which case the interest rate assumptions specified under the Interest Rates topic will be used.

You have the option to evaluate the lump sum factor using either a Constant interest rate, interest rates that are Variable by duration, or interest rates that are Variable by calendar year of decrement. If you select a Constant interest rate, the Pre-commencement rate is used to discount from the commencement date to the decrement date and the Post-commencement rate is used to discount payments from the payment date back to the commencement date.

If you select Variable by duration, duration is measured from either the valuation date or from the participant’s decrement date. Note that for benefits commencing at post-termination retirement age, the decrement date option refers to the retirement (second) decrement, not termination (first) decrement.

If you select Variable by calendar year of decrement, a constant interest rate will be used that is selected from the specified values based on the calendar year of decrement.

The Input is parameter tells ProVal whether to interpret the variable interest rates entered as forward rates or spot rates. If these are forward rates, then the rate specified at a particular duration from the starting point (e.g., duration 2-3, indicating the time interval from 2 to 3 years after the starting point) is used for all discounting during the specified time period, for all payments made during or after that period. The variable interest option with forward rates and duration measured from the decrement date is useful for determining commuted values for solvency & windup liability calculations for Canadian registered pension plans, typically, with two durations: up to 10, 10 or more. If the rates are spot rates, then the rate specified at a particular duration from the starting point (e.g., duration 0-5, indicating the time interval from the starting point to 5 years after the starting point) is used to discount the payment at that duration for the entire period from the starting point until payment. The variable interest option with spot rates and duration measured from the valuation date may be useful, for valuation purposes under the Pension Protection Act of 2006 (PPA) for U.S. qualified plans, when the intention is to use the IRC section 417(e) minimum lump sum present value segment rates. Typically rates would be entered for three durations: 0-5, 5-20, 20 or more.

Selecting the Variable by duration from option will make available a drop-down list box for selecting the starting point for measuring duration, either the valuation date or the participant’s decrement date, and a spreadsheet in which to enter two or more rates. Complete a row for each interest rate. For example, if the interest rate is 5% for the first 10 years after the valuation date or decrement date (i.e., for durations 0-1, 1-2, 2-3, …, 8-9 and 9-10) and 6% thereafter (i.e., for durations 10-11, 11-12, etc.), then enter:

From	Up To	Rate
0	10	0.05
10	--	0.06

ProVal fills in the Up To column automatically, and the last rate will be used for the last duration entered and all durations thereafter. Note that the From cell in the first row displays a duration of 0 and cannot be edited. Our example involved only two interest rates: if you have several varying interest rates, you may need to press the ENTER key, to create a new row, when you get to the bottom of the spreadsheet. Durations entered may range from 1 to 100 years, inclusive. Note: because you cannot enter a negative or zero duration, variable interest rates cannot be specified for a time period prior to the valuation date. In fact, ProVal always uses the rate in the first row for entry age normal cost method calculations at decrement dates before the valuation date.

If you specify variable interest rates with duration measured from the valuation date, results for valuation liabilities that depend on lump sum factor component values (generally) will differ materially from results for these liabilities if interest rates vary by duration from the decrement date. Consider forward rates entered as in our example above. If interest rates vary by duration from decrement and a participant age 35 on the valuation date decrements at age 55, then the value of the lump sum factor at the decrement date is based on 5% interest from age 55 to age 65 and 6% interest at older ages. This value is the same as if, instead of a lump sum factor component, you had coded a table component, using a table of annuity values populated by means of the Calculate Annuity Factors option of a Benefit Component Table, with variable interest rates selected to create the annuity values. If interest rates vary by duration from the valuation date, however, then the value of the lump sum factor for this participant decrementing at age 55 is based on 6% interest (as decrement occurred 20 years after the valuation date).

In a forecast, if you specify variable interest rates with duration measured from the valuation date, results for valuation liabilities that depend on lump sum factor component values (generally) will differ materially from results for these liabilities if interest rates were to vary by calendar year (which is not an option for lump sum valuation interest rates but is an option for varying valuation assumption interest rates). Consider a Core Projection with a (baseline) Valuation Date of 1/1/2009 and the following sample grid of forward rates that are Variable by duration from the valuation date:

From	Up To	Rate
0	2	0.05
2	--	0.06

The lump sum values will be produced using interest rates as follows:

	Valuation date in Core Projection
Year of decrement	1/1/2009	1/1/2010	1/1/2011
2009	LS Factor @ 5% for 2 years, 6% thereafter
2010	LS Factor @ 5% for 1 year, 6% thereafter	LS Factor @ 5% for 2 years, 6% thereafter
2011	LS Factor @ 6%	LS Factor @ 5% for 1 year, 6% thereafter	LS Factor @ 5% for 2 years, 6% thereafter
2012	LS Factor @ 6%	LS Factor @ 6%	LS Factor @ 5% for 1 year, 6% thereafter

Consequently, when used in a forecast, this valuation assumption has a built-in gain or loss (due to change in actuarial assumptions) because the two year duration does not decrease from one valuation date to the next, that is, the interest rate assumed to apply for a particular plan year, such as 2012 in our example, is not the same for all forecast valuation dates. The valuation assumption of (forward) interest rates that vary by duration from the decrement date, however, will not produce a gain or loss (due to change in actuarial assumptions) in a forecast, because the interest rates used to determine lump sum present values do not change with the forecast valuation date.

If the lump sum interest basis is defined as Variable by duration from the valuation date with spot rates selected or, in the U.S. qualified mode, if Use underlying liability interest rates is selected under the “PPA” law type of funding Valuation Assumptions, you may compute the lump sum value using either the Discount to valuation Date, adjust to decrement (annuity substitution) rule or the Discount to decrement rule. ProVal’s methodology for discounting with spot rates (and segment rates) is discussed in the Technical Reference article entitled “Discounting with spot rates (and segment rates)”.

Choose Discount to valuation Date, adjust to decrement (annuity substitution) to calculate a lump sum factor at decrement that is adjusted such that, when it is discounted to the valuation date, it is equivalent to valuing the annuity payments implicit in the lump sum. For U.S. qualified pension plans under the PPA law selection, this is appropriate for converting annuities to lump sums on the IRC section 417(e) interest and mortality bases as discussed in IRS Reg. 1.430(d)-1(f)(4)(iii)(B).
Choose Discount to decrement to calculate an unadjusted lump sum factor at decrement. For example, if decrement occurs four years after the valuation date, the factor is determined based on the rates as of the valuation date with the rate(s) for the first four years dropped. For U.S. qualified pension plans under the PPA law type, this is appropriate for converting lump sums to annuities on the IRC section 417(e) interest and mortality bases as discussed in example 14 of IRS Reg. 1.430(d)-1(f)(9) and Question 2 of the 2010 IRS Gray Book.

Under a “PPA” law selection in the U.S. qualified mode, to evaluate the lump sum factor for any Actuarial Liabilities you have chosen to calculate, check the Use alternative interest rates box if you wish to specify different interest rates fro m the interest rates indicated by the Target and PBGC Liabilities parameter settings (see the discussion above of this parameter). If you do not check this box, the Target and PBGC Liabilities parameter settings will be used also to evaluate the lump sum factor for actuarial liabilities – unless you have elected to compute entry age normal liabilities and have selected the Use underlying liability interest rates option (discussed above) to value the lump sum component for target and PBGC liabilities, in which case, you must check this box (because ProVal will not compute entry age normal liabilities under the segment or spot rate structure). If you check the Use alternative interest rates box, next click the Parameters button to specify the alternative constant interest rate or variable by duration interest rates for evaluating the lump sum factor for actuarial liabilities. For details about coding alternative constant and variable by duration interest rates, see the (preceding) discussion of these options for the Target and PBGC Liabilities parameter. Note: If you have selected an alternative interest rate basis under the Actuarial Liability topic, ProVal will not refer to that basis to determine lump sum factor values; thus you must enter the lump sum interest rate basis explicitly, under either the Target and PBGC Liabilities parameter or the Use alternative interest rates parameter.

Check the Interest assumption sensitivities applicable box to apply the sensitivity amount (if any) specified in the Valuation when calculating the lump sum factor values when you have selected to vary the lump sum and optional form interest rate. The Interest assumption sensitivities applicable parameter, however, does not apply when calculating lump sum values based on the underlying liability interest rate (see the separate section of this article below). When a factor is based on the underlying liability interest rate, the sensitivity is only applied when you select to vary the interest rate assumption under the Sensitivity button of the Valuation.

Mortality Rates

These parameters deal with selecting the Mortality Rates used to determine a present value, at the participant’s decrement date, associated with the lump sum benefit payment. Thus they appear for all underlying Payment Forms except a certain only annuity whose certain period commences immediately upon decrement (that is, the certain period is not deferred).

Select from the list of all Mortality Rate Reference Tables that have been saved and unhidden in the current Project. Click the button to create a new table or modify an existing one. In Canadian mode, you may select the option to <use valuation assumptions> for the lump sum mortality. If you select this option for the primary annuitant, the mortality defined for vested terminated members under the decrements topic will be used. If you select <use valuation assumptions> for the contingent annuitant, the mortality defined for survivors & beneficiaries will be used. The <use valuation assumptions> option is only supported when the corresponding mortality is either a single rate table or only varies by coded field. Note, if you select <use valuation assumptions> and the "Assume zero pre-commencement mortality for inactives and actives after decrement" option is checked in the decrements topic of valuation assumptions then the mortality rates will be zero during any lump sum deferral period.

The probabilities in the selected table will be applied to discount annuity payments for survivorship from each payment date back to the decrement date; thus, for a deferred lump sum factor, this mortality table applies during both the payment period and the deferral period. If you wish to apply different mortality rates during the payment and deferral periods, you must select a mortality table of the "Age by Pre/post-commencement" type and/or with different pre/post-commencement improvement scales, as applicable.

If the lump sum factor component is used in a Benefit Definition initiated by retirement, termination or disability, then the annuitant is the member and ProVal “looks up” mortality rates according to the member’s age and sex. If the lump sum factor component is used in a Benefit Definition initiated by death, then the annuitant may be either the member or the beneficiary (see the discussion under our Command Reference Help article for Benefit Formula Components), as determined by the choice for the lump sum factor component parameter pertaining to the mortality basis for death benefits. When that parameter box is checked, the (deceased) member’s age and sex are used to “look up” mortality rates from the specified mortality rate reference table. When that box is unchecked, annuitant mortality is based on the beneficiary’s age and sex, where the beneficiary is presumed to be the spouse. (ProVal applies the marital assumptions, including the setting of the husband/wife age difference parameter of the Other Valuation Parameters topic, to determine the beneficiary’s age for lump sum value “look-ups”.)

If a dynamic mortality table is selected, ProVal will generate the mortality rates expected to be issued (or previously issued) by the U.S. Internal Revenue Service for the appropriate year and use those rates in calculating the lump sum factor component’s value. Specify whether the rates generated will be those in effect as of the valuation date or those in effect as of the participant’s decrement date, by selecting one of these two choices under the Mortality table will be dynamically generated as the IRS table expected to be in effect as of the parameter. Note that for benefits commencing at post-termination retirement age, the decrement date option refers to the retirement (second) decrement, not termination (first) decrement.

If the Payment Form underlying the lump sum factor component is a joint and survivor or post-decrement death benefit type, then there are separate parameters for Primary Annuitant and Contingent Annuitant mortality, with the same mortality rate reference table choices available as for single life annuities. If a dynamic mortality table is selected for both the primary annuitant and the contingent annuitant, then the selection of effective date (either “valuation date” or “decrement date”) under the Mortality table will be dynamically generated as the IRS table expected to be in effect as of the parameter will be applied for both primary annuitant and contingent annuitant mortality. If the lump sum factor component is used in a Benefit Definition initiated by retirement, termination or disability, then the primary annuitant is the member and the contingent annuitant is the beneficiary, presumed to be the spouse. Hence, ProVal “looks up” primary annuitant mortality rates using the member’s age and sex and “looks up” contingent annuitant mortality rates using the beneficiary’s age and sex (age and sex determined as discussed above, regarding the contingency initiating the benefit). If the lump sum factor component is used in a Benefit Definition initiated by death, then the primary annuitant may be either the member or the beneficiary (according to the selection, referred to in the preceding paragraph, for the lump sum factor component parameter pertaining to the mortality basis for death benefits) and the contingent annuitant is presumed to be the primary annuitant’s spouse. ProVal “looks up” primary and contingent annuitant mortality rates using the appropriate life, member or beneficiary, to determine age and sex. (Note that it is unlikely that a joint and survivor payment form with the beneficiary as primary annuitant would be intended for a benefit initiated by death, because the contingent annuitant is then presumed by ProVal to be the deceased member.)

Check the Mortality assumption sensitivities applicable box to apply the sensitivity variations (if any) specified in the Valuation when calculating the lump sum factor values when you have selected to vary the lump sum & optional forms mortality. Note that this parameter will only apply to mortality specified on this screen. That is, if you have selected Use Liability interest rate & mortality (available only for some liability types), application of any sensitivity will follow the variations applied to valuation mortality under the Sensitivity button of the Valuation.

Legislated Liabilities

This topic may include parameters, in the U.S. qualified, Canadian registered and universal modes, that deal with the interest and/or mortality basis to be used to value the lump sum factor for certain legislated or regulatory liabilities that may have their own interest rate(s) and/or mortality rate table(s) associated with them (and, typically, also used to value lump sum payments). Please note that the value of lump sum factors used within an Employee Contribution Definition is always computed using the interest and mortality assumptions described in the preceding sections of this article.

These liabilities (and the relevant U.S. qualified mode law selection) are:

ProVal Mode	Funding Valuation	Accounting Valuation
U.S. Qualified Pension	PPA target liabilities (on both the funding and maximum tax deductible bases), if the law selection is “Pre-PPA and PPA” PBGC variable rate premium liabilities (under PPA and/or prior law, depending on the law selection), except for the “Multiemployer” law selection RPA ‘94 current liabilities (on both the minimum funding and maximum tax deductible bases), for law selections other than “PPA” RPA ’94 gateway current liability, if the law selection is “Pre-PPA” or “Pre-PPA and PPA”	ASC 960 liability
Canadian Registered Pension	Solvency & windup liabilities (on both the transfer value and annuity purchase interest bases)

Universal Pension	None	ASC 960 liability

In the U.S. qualified mode, the parameter named (as appropriate for the particular law selected in a funding Valuation Assumptions set) PBGC and Current Liabilities (“Pre-PPA” law), Current Liability (“Multiemployer” law) or Target, PBGC and Current Liabilities (“Pre-PPA and PPA” law) allows you to choose whether, for calculation of the indicated liabilities, the interest rate(s), and perhaps the mortality rate table(s), associated with the liability (and specified by other parameters in the Valuation Assumptions) will be substituted for the interest and mortality basis specified for the lump sum factor. Under the “PPA” law selection, lump sum factors are valued for all liabilities on the lump sum mortality basis (thus there is no option for substituting mortality); selection of the liability basis for the interest rate(s) is addressed (see the discussion above) by the Use underlying liability interest rates parameter.

In the Canadian registered mode, the Solvency & Windup Liability parameter allows you to choose whether, for calculation of solvency & windup liabilities on both the transfer value and annuity purchase bases, the interest rate(s), and the mortality rate table(s), associated with solvency & windup liabilities will be substituted for the interest and mortality basis specified for the lump sum factor.

For accounting runs, whether ASC 960 liability has its own associated interest rate (i.e., different from that entered under the Interest Rates topic) depends on whether an alternative interest rate has been selected under the Liability Methods topic. The parameter named ASC 960 Liability allows you to choose, for computing ASC 960 liability, whether the alternative interest rate, and perhaps the mortality rate table(s) specified under the Decrements topic of Valuation Assumptions, will be substituted for the interest and mortality basis specified for the lump sum factor.

Selection of the Use interest rate & mortality specified above option indicates that all liabilities, including the specified legislated ones, should be based on the lump sum factor’s specified interest and mortality basis.

Select the Use liability interest rate (with mortality specified above) option to use the lump sum factor’s specified mortality basis and substitute only the underlying liability interest rate(s) when computing specified legislated liabilities. (Note that this is, typically, the setting under a “Pre-PPA and PPA” law selection in the U.S. qualified mode.)

The Use liability interest rate & mortality option indicates substitution of both the underlying liability interest rate(s) and mortality basis for the lump sum factor basis. (Note that although this setting is available under a “Pre-PPA and PPA” law selection in the U.S. qualified mode, it would be atypical to select it.) In an accounting valuation, if the option to substitute both interest and mortality is selected, then (both) the alternative interest rate(s) and the mortality rate table(s) used for PBO will be substituted for the lump sum interest and mortality bases.

Thus, if either of the last two substitution options is selected, the interest rate assumption used to calculate the value of the lump sum factor component will be determined by parameter choices under the topics indicated below:

Liability Type	Topic(s)
Target Liabilities	Target Liabilities
PBGC Variable Rate Premium Liabilities	PBGC Variable Premium Liability
RPA ’94 current liabilities	Current Liability
Solvency Liability	Solvency Liability Annuity Purchase Liability and Solvency Liability Transfer Value Liability
Windup Liability	Windup Liability Interest Rates
ASC 960 Liability	Liability Methods

Likewise, if the last substitution option is selected, the mortality assumption used to calculate the value of the lump sum factor component will be determined by parameter choices under the topics indicated below:

Liability Type	Topic(s)
PPA PBGC Variable Rate Premium Liabilities	Target Liabilities
Pre-PPA PBGC Variable Rate Premium Liability	Current Liability
RPA ’94 Current Liabilities	Current Liability
Target Liabilities	Target Liabilities
Solvency & Windup Liabilities	Solvency Liability Annuity Purchase Liability and Solvency Liability Transfer Value Liability
ASC 960 Liability	Decrements

Note that it is the Active Mortality after Decrement parameter choice of the Decrements topic that will be used; ProVal will select the mortality table appropriate for the contingency initiating the Benefit Definition in which the lump sum factor component is used.

The selected substitution option applies to the specified liabilities for the type of Valuation Assumptions (accounting or funding). Thus, if you wish to use the lump sum factor component’s mortality and interest assumptions for some but not all of the funding specified liabilities in the U.S. qualified mode then you must run separate Valuations (or Core Projections, in a forecast) for one or more specified liabilities and select these Valuations (or Core Projections) as overrides in your Valuation Set (or Deterministic or Stochastic Forecast).

Cost of Living Adjustments (COLAs)

Check Reflect COLAs on annuities if COLAs should be reflected in the conversion factors for this optional form. This applies to both the numerator (normal form) and denominator (optional form). Note that for this purpose, COLAs will only be applied to annuity payment forms (e.g. COLAs on lump sums, even those with installments, will not be reflected). This parameter will default to being checked for lump sum payment forms.