Minimum Funding Amortization Bases
The Minimum Funding Amortization Bases topic furnishes detailed information for determining the statutory minimum required contribution calculated during execution of a Valuation Set, Deterministic Forecast or Stochastic Forecast.
The selection of Applicable Provincial Law determines the appropriate amortization period for new amortization bases and generates warning messages under certain circumstances where ProVal’s parameterization appears to be in conflict with current law and regulations. The parameters checked for warnings include the amortization parameters found on this dialog box, any prior year credit balance entered under the Initial Asset Values topic, the solvency asset valuation method selection and any includable letter of credit entered under the Letters of Credit topic.
If the Applicable Provincial Law selection is Federal (PBSA) , Ontario , Quebec , British Columbia, or Manitoba then the Params button becomes accessible. For these law selections, you must click this button and complete the additional parameters in the next dialog box. For details about these parameter settings, see the separate discussions under Federal Minimum Funding Additional Parameters, Ontario Minimum Funding Additional Parameters, Quebec Minimum Funding Additional Parameters, British Columbia Additional Parameters and Manitoba Additional Parameters .
Check the Perform triennial valuations box to perform a complete valuation in the initial valuation year and every third year after a full valuation. Partial valuations will be performed for the interim years if permissible based on the regulations under the Applicable Provincial Law. The requirements are checked at each valuation date, so a plan may be eligible for partial valuations for the first part of a forecast but become ineligible at a future valuation date. If a plan does not satisfy the requirements permitting a partial valuation, a complete annual valuation will be performed. Complete valuations will always be performed in the following cases:
Valuation Set
Initial year of a forecast
Any year with a plan amendment
The year following a year in which a complete valuation was performed due to not meeting the eligibility requirements for a partial valuation
In a partial valuation, the normal cost rate and amortization payments are based upon the results of the last complete annual valuation. Thus, the normal cost is defined as the prior normal cost rate multiplied by the current total salary, and all amortization amounts remain level with the prior year except that they will increase with payroll if so parameterized, and fully amortized bases will drop off. For details regarding the criteria that ProVal checks to determine if a partial valuation is permitted, see the Technical Reference article entitled “Triennial valuations ”.
If triennial valuations are selected, enter the required parameters under the Params button including a method for estimating the normal cost in the partial valuation years. If triennial valuations are selected and a Valuation Set is run, ProVal will produce an exhibit summarizing the minimum required contribution for the valuation year plus the estimated contributions for the two years following the valuation year. The following parameters must be entered:
Select a methodology for estimating the employer normal cost for the interim years;
Complete the assumptions for a Valuation Set (note that these assumptions are ignored in a forecast and the actual forecast experience will be used).
Schedule of Minimum Funding Amortization Bases
The schedule of minimum funding amortization bases Schedule date is the “as of” date for outstanding balances of the (ongoing and solvency liability) amortization bases. This date should be the same as that entered for the Valuation Date under the Initial Asset Values topic. Note that this schedule date is ignored during the calculations. Thus, for example, a plan change increasing benefits in the middle of the plan year cannot be accounted for by entering the mid-year effective date as the schedule date. In that situation, separate runs, reflecting the old and new plan provisions, with a schedule date equal to the valuation date, must be done, and the results prorated or combined in some other appropriate manner, to account for the mid-year effective date. For an illustrative approach for handling this situation, see our Frequently Asked Questions article entitled Mid-year change in benefit level. (Although this article was written specifically to address U.S. regulatory valuation requirements for mid-year plan amendment effective dates, the approach to parameter coding it illustrates should be useful for Canadian plans as well.) The schedule date entered is considered in ProVal only when a Roll Forward is attempted using the Asset & Funding Policy Update button; a roll forward is not permitted if the valuation and schedule dates do not match. (Copying amortization schedules from a Valuation Set will set the schedule date equal to the Valuation Date of the Valuation Set.)
The Description, Remaining Period and Payment for each existing amortization base are listed in the box below the Schedule date. ProVal also shows, at the bottom of the list, the Total payment for all bases. To edit an entry in the list, select it, or to add a new base, click the New button. The Minimum Funding Amortization Basis dialog box will appear, containing the parameters that define the selected amortization base or blank parameters for a new base. Coding the parameters of the Minimum Funding Amortization Basis dialog box is discussed, in a separate section, at the end of this article.
Check the Amortize as percent of payroll with box if you wish to determine all amortization payments as a level percent of payroll, perhaps reflecting an assumed annual rate of increase in payroll. Enter the assumed increase rate, for example, 0.03 for a 3% increase in payroll each year. To amortize as a level percent of a flat (non-increasing) payroll, enter 0. (Note that if under the Contribution Policy topic you specified your Contribution Policy as "Normal Cost + Supplemental Cost", the value entered for the Amortize as percent of payroll with parameter must be the same as the amortization payment increase rate entered under the additional parameters button of the Contribution Policy. ProVal will only store one value for these two parameters.)
Check the defer new special payments by 1 year box if you wish the special payments established as of the valuation date to have the first payment deferred for one year. The option to defer special payments for one year is only available if (1) you have selected an applicable provincial law other than "Federal (PBSA)" or "Quebec", (2) the checkbox offset technical deficiencies first is not checked, (3) the ongoing adjustment methodology when solvency deficiency is set to "do not adjust", and (4) for ongoing amortization bases, maintain "payment schedule" is selected under the advanced button discussed above.
The remaining parameters of this dialog box are divided into two sections, discussed (in separate sections of this article) below:
The parameters in the Ongoing Valuation section control the methodology for adjusting ongoing bases when valuation gains are determined and/or when solvency deficiency bases are added or changed.
The parameters in the Solvency Valuation section control the methodology for adjusting solvency bases when solvency gains are determined.
Enter the amortization periods for new bases. Separate parameters are provided for actuarial losses and plan amendments.
Select the desired Methodology for applying ongoing gains when a going-concern valuation gain is created:
Pro-rate existing payments will pro-rate the outstanding balances and amortization payments of each ongoing base by the ratio of the gain to the total outstanding balance. Thus, when an ongoing valuation gain is created, existing amortization bases and payments will be pro-rated down by an amount equal to a portion of the total gain.
Offset applies the gain to one base at a time, based on the parameters selected in the drop-down boxes. Select Offset first scheduled payments to apply the gain starting with the base with the shortest remaining amortization period, or select Offset last scheduled payments to apply the gain starting with the base with the most recently scheduled payments (i.e., the longest remaining amortization period). You must also select whether to hold payment constant or hold period constant when applying the gain. When the payment is held constant, the remaining amortization period is adjusted down. When the period is held constant, the amortization payment is adjusted down. For example, if you select “first” and “period”, then the gain will be applied as an offset to the amortizations that were scheduled first, in successive order, until the gain is completely offset. The gain will be applied first to the base with the shortest amortization period and, if that base can be completely offset, the remaining gain will be applied to the base with the next shortest amortization period. If a base can be only partially offset, the outstanding balance and amortization payment will be reduced pro-rata, while the amortization period remains unchanged.
There are a number of additional parameters under the Advanced button.
The Calculate solvency special payments check box controls whether or not solvency special payments will be included in the calculation of the minimum required contribution. When this box is unchecked, the solvency special payments entered in the amortization schedule will be ignored and no new solvency special payments will be established by ProVal. This box is always required to be checked if the applicable provincial law selection is Quebec and the Supplemental Pension Plans Act is applied. If this box is unchecked, it is permissible to turn off solvency liability in the underlying Valuation(s) or Core Projection(s) in the following situations:
Performing triennial valuations with an Applicable Provincial Law selection of British Columbia, Newfoundland, Nova Scotia or Saskatchewan (in these cases, solvency funded status is not required to check if the plan is eligible for a triennial valuation).
If not applying available surplus to the minimum required contribution.
If applying available surplus to the minimum required contribution with an Applicable Provincial Law selection of Ontario or Saskatchewan (in these cases, solvency funded status is not required to determine surplus available to apply to the minimum contribution).
When a Valuation Set or forecast that does not have solvency liabilities in the underlying Valuation(s) or Core Projection(s) is processed, the maximum tax deductible contribution will be based upon only the ongoing unfunded liability. (Note that an Applicable Provincial Law selection of Quebec always requires the Valuation(s) or Core Projection(s) to provide solvency liability, because the calculation of the provision for adverse deviation is directly related to solvency liabilities.)
Enter the amortization period for new solvency bases.
Select the desired Methodology for applying solvency gains when a solvency valuation gain is created:
Pro-rate existing payments will pro-rate the outstanding balances and amortization payments of each solvency base by the ratio of the gain to the total outstanding balance. Thus, when a solvency gain is created, existing amortization bases will be pro-rated down by an amount equal to a portion of the total gain.
Offset applies the gain to one base at a time, based on the parameters selected in the drop-down boxes. Select Offset first scheduled payments to apply the gain starting with the base with the shortest remaining amortization period, or select Offset last scheduled payments to apply the gain starting with the base with the most recently scheduled payments (i.e., the longest remaining amortization period). You must also select whether to hold payment constant or hold period constant when applying the gain. When the payment is held constant, the remaining amortization period is adjusted down. When the period is held constant, the amortization payment is adjusted down. For example, if you select “first” and “period”, then the gain will be applied as an offset to the amortizations that were scheduled first, in successive order, until the gain is completely offset. The gain will be applied first to the base with the shortest amortization period and, if that base can be completely offset, the remaining gain will be applied to the base with the next shortest amortization period. If a base can be only partially offset, the outstanding balance and amortization payment will be reduced pro-rata, while the amortization period remains unchanged.
Check the Allow amortization periods to reduce to 0 years if possible box to permit an amortization base to be completely eliminated if there is a sufficient gain. Otherwise (if the box is not checked), amortization periods will not be reduced to less than 1 year, unless they can be eliminated because there is no longer a solvency deficiency. This box is available only if you have selected the option to hold payments constant and are therefore adjusting amortization periods.
Parameters defining a minimum funding amortization base
Enter this information for a new base, or edit it for an existing base:
Description, which is the name you choose to describe this base.
Type of liability base: Select either Ongoing liability or Solvency liability.
Date of first payment. Enter the date the first payment was due (e.g., 1/1/2009 for a 2008 plan year loss). This parameter is optional unless you have checked the box to defer special payments by 1 year, the base you are entering was established on the Valuation Date that was entered under the Initial Asset Values topic, and the first payment is due 1 year after the Valuation Date.
Initial amount of the base on the date it was established.
Initial Amortization period (years) as of the date the base was established.
Remaining years as of the later of the Schedule date and the Date of first payment (in the case of a payment deferred by 1 year), including the current plan year (year beginning on the Valuation Date entered under the Initial Asset Values topic).
Outstanding balance (ongoing basis). Enter the unamortized amount of the base as of the Schedule date, based on the funding interest rate, and include the amount to be amortized during the current plan year. This input is optional for solvency liability bases. It is also optional for ongoing bases when the For ongoing amortization bases, maintain parameter is set to "payment schedule" under the Advanced button on the main dialog.
Annualized amortization amount (total amount of amortization payment made over the year) as of the beginning of the current plan year. This input is always required for solvency bases. It is optional for ongoing liability bases when the For ongoing amortization bases, maintain parameter is set to "present value" under the Advanced button on the main dialog, in which case ProVal directly calculates the amortization amount, using any value specified here only to generate a warning, by way of a footnote, in the Valuation Set Exhibits if the two values differ.
For ongoing liability bases (whether the base is the initial unfunded liability, a plan change or an actuarial loss), indicate the Initial source of the base. Select an option for the initial source of this amortization base: a "Technical (e.g., actuarial loss)”, which is an actuarial deficiency (sometimes referred to as an actuarial loss); the “Initial unfunded liability”; or an “Improvement (e.g., plan change)”, sometimes referred to as an amendment. Currently this information is used when
the option to apply ongoing gains to technical deficiencies first (before the initial unfunded liability or an improvement) is elected, indicated by a check in the Offset technical deficiencies first box of the Minimum Funding Amortization Bases dialog box, or,
under a Quebec Applicable Provincial Law selection in accordance with the Supplemental Pension Plans Act, under which statute(s) solvency technical deficiency bases are eliminated when the plan is in surplus but an additional funding buffer is required in order to eliminate solvency plan amendment bases, or,
under a Quebec Applicable Provincial Law selection in accordance with the regulation respecting the funding of municipal and university sectors, under which statute/regulation gains are applied to technical deficiency bases first, during the transition period.
For ongoing liability bases, indicate whether to Include payments beyond 5 years in solvency assets. (For a Quebec Applicable Provincial Law selection and Regulation respecting funding of the municipal and university sectors selected, this check box does not exist.) Check this box to indicate that this is a grandfathered ongoing liability base with respect to the determination of solvency assets, and thus all future amortization payments, rather than just those payable during the next 5 years, are includable in solvency assets. If Federal Applicable Provincial Law is selected and you are applying the regulations effective July 1, 2010, a check in this box indicates that a special payment was reflected when the initial solvency deficiency was created. For solvency bases, all future special payments generally are always included in the solvency assets; therefore all future amortization payments, rather than just those payable during the next 5 years, are included in solvency assets, and thus the setting of this check box is ignored. See also the following discussion of optional settings.
If Quebec Applicable Provincial Law is selected and the regulation respecting the funding of municipal and university sectors is applied, the Include payments beyond 5 years in solvency assets check box does not exist. Instead you must indicate whether to Eliminate the base in the first valuation after 12/30/2011. Only bases identified with an initial source of “Technical” may be eliminated in the first valuation after 12/30/2011. Any “Initial unfunded liability” or “Improvement” bases will not be eliminated. Refer to the regulations for further information on which bases are permitted to be eliminated.
Asterisks denote parameters of the Minimum Funding Amortization Basis dialog box that are not required to define the liability base; any entries made, however, for these parameters will be displayed in the Valuation Set Exhibits. The required entries depend on the whether the Type of liability base is Ongoing or Solvency, and also on the setting of the For ongoing amortization bases, maintain parameter under the Advanced button on the main dialog.
For an Ongoing liability base when the Plan Sponsor is obligated to fund a specific unfunded liability amount (i.e., the For ongoing amortization bases, maintain parameter is set to "present value" under the Advanced button on the main dialog), the required entries are the Remaining years, the Outstanding balance (ongoing basis), the Initial source of base and whether to Include payments beyond 5 years in solvency assets (or, for a Quebec Applicable Provincial Law selection and Regulation respecting funding of the municipal and university sectors selected, whether to Eliminate the base in the first valuation after 12/30/2011). ProVal directly calculates the amortization amount. Note these special rules when the Applicable Provincial Law is Federal (PBSA): The Include payments beyond 5 years in solvency assets box should be checked for any going concern special payment that was reflected in the calculation of the initial solvency relief base and thus should be used to offset the solvency deficiency. Any solvency special payments entered will be used to offset the solvency deficiency. For the special payments available to offset the solvency deficiency, the present value of the special payments will be determined based on a period that is the lesser of the remaining amortization period for the special payment or the remaining solvency relief period (as long as the period is more than 5 years). Once the period becomes 5 years or fewer, the solvency deficiency is no longer offset by the present value of the special payments.
For an Ongoing liability base when the Plan Sponsor is obligated to fund specific payments (i.e., the For ongoing amortization bases, maintain parameter is set to "payment schedule" under the Advanced button on the main dialog), the required entries are the Remaining years, the Annualized amortization amount and the Initial source of base. ProVal directly calculates the outstanding balance.
For a Solvency liability base, the Plan Sponsor is obligated to fund a specific annual payment; therefore the required entries are the Remaining years, the Annualized amortization amount and the Initial source of base. ProVal directly calculates the outstanding balance.
If you have checked the box to defer special payments by 1 year, the base you are entering was established on the Valuation Date that was entered under the Initial Asset Values topic, the Date of first payment is required and must be exactly 1 year after the Valuation Date.
Click OK to return to the Minimum Funding Amortization Bases dialog box, in which your new base, or edits to an existing base, will appear.