Pension Modes

The Additional Plan Amendments topic is used to enter "quick-and-dirty" plan amendments for active participants and cost-of-living adjustments (COLAs, called pension increases in UK mode) for inactive participants. ProVal will value these amendments and COLAS in addition to any that are included in the underlying Core Projection(s) (as parameterized in Projection Assumptions). 

Active Benefit Amendments

To adjust active liabilities and active benefit accruals, at the forecast stage, for cumulative experience inflation, click the Value Additional Active Benefit Amendment(s) checkbox.  Note that this type of amendment, unlike one that may be parameterized directly in the Plan Amendments topic of the Projection assumptions, will have the same linearly proportional impact on both active benefit accruals and active liabilities (i.e., active benefits will be increased uniformly for both past and future service). The most common example of this kind of amendment would be an hourly unit benefit increase that applies to all service. 

For each year in the forecast period for which there is an active benefit amendment, inflation is accumulated over the period starting with the later of 1) the year beginning on the baseline valuation date and 2) the most recent year of a previous amendment granted, and running up to this (current) forecast year.  You may choose to have active plan amendment adjustments that, relative to inflation, will either be constant or will vary over the forecast period.

You may choose to have active plan amendment adjustments that, relative to inflation, will vary over the forecast period, by selecting the Variable by year option and then specifying a calendar year range for each unique set of assumptions. For each range, enter in the grid the Fraction of Cumulative Inflation parameter values. For example, enter a value of 0.75 if benefits should be increased by 75% of cumulative inflation, or enter 1.0 if benefits should increase in tandem with inflation. Thus, if the baseline valuation date is 1/1/2010, for example, and benefits should be increased by 75% of cumulative inflation for years through 2011 (that is, for the first two years of the forecast period) and by 100% thereafter, then enter

From	To	Fraction of Cum. Inflation
--	2011	0.75
2012	--	1.00

ProVal fills in the To column automatically, and the last value will be used for the last year entered and all years thereafter. Note that the From box in the first row cannot be completed. Our example involved only two fractions of cumulative inflation: if you assume differing fractions over the forecast years, you may need to press the ENTER key, to create a new row, when you get to the bottom of the spreadsheet.

You may choose to have active plan amendment adjustments that, relative to inflation, will be level over the forecast period, by selecting the Constant rate option and then specifying the Fraction of Cumulative Inflation that will be granted at each amendment date. Under this option, ProVal keeps track of the cumulative inflation and then adjusts benefits by the specified percentage of that cumulative inflation up to the current amendment date. For example, enter a value of 0.75 if accrued and projected benefits should be increased by 75% of cumulative inflation. Active member benefit amendments are presumed to occur each year, starting with the year beginning on the baseline Valuation Date of the forecast (aka the baseline year). To grant amendments less frequently than annually, check the Grant less often than annually box. Then enter, in the text field for the First Year of Grant parameter, the first year during which an active benefit amendment based on experience inflation will be granted, and valued (for example, 2010, if the first grant year is the year beginning on the valuation date anniversary in the year 2010). Enter also the number of years between grants, in the text field of the Frequency Thereafter: Every n years parameter. For example, enter a value of 2 to increase benefits every other year by the compound value of inflation over the prior 2 years. Note that if you enter a value of 1, then amendments will be granted every year, but starting with the year entered for the First Year of Grant parameter, not with the baseline year of the forecast. Likewise, if you enter a value of 0, an amendment will be granted just once, in the year beginning on the valuation date anniversary in the year entered as the First Year of Grant.

Additional cost-of-living adjustments (COLAs) (pension modes except U.K.)

If you wish to Provide additional cost-of-living adjustments (COLAs) at the forecast stage, check the box and complete the parameters as described below. Note that experience and valuation COLAs are included in the underlying Core Projection(s) as specified in Projection and Valuation Assumptions. Any COLAs entered here, generally representing ad hoc COLAs that are not automatically part of the plan benefits, will be in addition to those already present in the Core Projection(s).  

There are some parameters found under the Forecast Analysis topic of Asset & Funding Policies that pertain to any additional COLAs provided through the Stochastic Assumptions.  The Experience COLAs Amortized as parameter indicates whether the additional COLAs should be valued as a plan amendment or an experience gain or loss.  The Additional COLAs Applied to parameter indicates whether the additional colas are applied to just benefits in pay status or to all inactive benefits.

For each year in the forecast period for which an additional COLA is granted, inflation is accumulated over the period starting with the later of 1) the year beginning on the baseline valuation date and 2) the most recent year of a previous COLA grant, and running up to this (current) forecast year.  Note that any stochastic COLA (pension increase) adjustments specified are applied uniformly to all participants, irrespective of any COLA parameters used to develop the liabilities. 

You may choose to have additional COLAs that, relative to inflation, will vary over the forecast period, by selecting the Variable by year option and then clicking the Rates button, to specify calendar year-dependent COLA information. For each range of years, enter in the grid the Fraction of Cumulative Inflation parameter values. For example, enter a value of 0.5 if the COLA granted will be 50% of cumulative inflation up to the specified year(s), or enter 1.0 if the COLA granted is equal to cumulative inflation up to that point. If the plan limits the COLA granted in any one year, also enter the COLA rate limits in the Maximum Additional COLA column, for example, 0.03, to grant at most a 3% COLA for a particular range of years.  The Minimum additional annual COLA parameter allows you to specify a minimum COLA rate to be granted, regardless of the level of cumulative inflation (for example, enter 0.02, to always increase pension amounts by at least 2% each year). 

Consider, for example, a scenario in which the baseline valuation date is 1/1/2010 and the COLA will be 75% of cumulative inflation for years through 2011 (that is, for the first two years of the forecast period) and equal to the inflation rate thereafter, with a 3% limit all years. Then enter:

From	To	Fraction of Cumulative Inflation	Maximum Additional COLA (optional)
--	2011	0.75	0.03
2012	--	1.00	0.03

ProVal fills in the To column automatically, and the last value will be used for the last year entered and all years thereafter. Note that the From box in the first row cannot be completed. Our example involved only two ranges of years for entering COLA information: if you assume differing fractions over the forecast years, you may need to press the ENTER key, to create a new row, when you get to the bottom of the spreadsheet.

You may choose to have COLAs that, relative to inflation, will be level over the forecast period, by selecting the Constant rate option and then specifying the Fraction of cumulative inflation that will be granted at each (future) forecast valuation date. The COLA granted will be the specified percentage of cumulative inflation up to the current forecast valuation date. For example, enter a value of 0.75 if the COLA granted should be 75% of cumulative inflation, or enter 1.0 if the COLA granted is equal to cumulative inflation up to that point. COLAs are presumed granted each year, starting with the year beginning on the baseline Valuation Date of the forecast (aka the baseline year).

You must enter a Minimum additional COLA and may also choose to apply a Maximum additional COLA (if any). For example, enter a value of 0.02 if the maximum additional COLA is 2%.  If you wish to value a COLA that is a constant percentage, irrespective of inflation, set the value of the Fraction of cumulative inflation parameter to zero and set the Minimum additional COLA parameter value equal to the desired constant percentage.  If pension benefit amounts are not to be decreased under deflation, then enter a value of 0 for the Minimum additional COLA.

To grant constant rate COLAs less frequently than annually, check the Grant less often than annually box. When this option is used, ProVal keeps track of the cumulative inflation, from the later of the initial valuation year and the year of the most recent grant, and then gives the specified percentage of that cumulative inflation in the year specified.  Enter in the text field for the First year of grant parameter, the first year during which a COLA based on experience inflation will be granted, and valued (for example, 2010, if the first grant year is the year beginning on the valuation date anniversary in the year 2010). Enter also the number of years between grants, in the text field of the Frequency thereafter: Every n years parameter. For example, enter a value of 2 to grant a COLA every other year; the increase in the pension amount will be determined as the ratio of the compound value of inflation up to the current forecast year over the lesser of the compound value up to 2 years prior or the compound value since decrement. Note that if you enter a value of 1, then COLAs will be granted every year, but starting with the year entered for the First year of grant parameter, not with the baseline year of the forecast. Likewise, if you enter a value of 0, a COLA will be granted just once, in the year beginning on the valuation date anniversary in the year entered as the First year of grant.

Additional Pension Increases (UK mode)

All sensitivities run under the Core Projection(s) referenced by the Stochastic Forecast use the Pension Increase parameters specified in the Valuation Assumptions along with the CPI and RPI increase rates specified in the Projection Assumptions. Therefore, the underlying pension increase assumptions are already present in the liabilities generated by the Core Projection(s). The remainder of this discussion is applicable only if you want to apply experience pension increases in addition to those inherently present in Projection Assumptions.

If you wish to Provide additional pension increases at the forecast stage, check the box and complete the parameters as described below. 

There are some parameters found under the Forecast Analysis topic of Asset & Funding Policies that pertain to any additional pension increases provided through the Stochastic Assumptions.  The Additional pension increases Amortized as parameter indicates whether the additional pension increases should be valued as a plan amendment or an experience gain or loss.  The Additional pension increases Applied to parameter indicates whether the additional pension increases are applied to just benefits in pay status or to all inactive benefits.

For each year in the forecast period for which a pension increase is granted, inflation is accumulated over the period starting with the later of 1) the year beginning on the baseline valuation date and 2) the most recent year of a previous pension increase grant, and running up to this (current) forecast year.

You may choose to have pension increases that, relative to inflation, will vary over the forecast period, by selecting the Variable by year option and then clicking the Rates button, to specify calendar year-dependent pension increase information.  For each range of years, enter in the grid the Fraction of Cumulative Inflation parameter values. For example, enter a value of 0.5 if the pension increase granted will be 50% of cumulative inflation up to the specified year(s), or enter 1.0 if the pension increase granted is equal to cumulative inflation up to that point. If you wish to limit the pension increase granted in any one year, also enter a value in the Maximum Additional Pension Increase column, for example, 0.03, to grant at most a 3% pension increase for a particular range of years. 

The Minimum additional annual pension increase parameter allows you to specify a minimum pension increase rate to be granted, regardless of the level of cumulative inflation (for example, enter 0.02, to always increase pension amounts by at least 2% each year). Note that the experience pension increase generated for any given year or range of years as a fraction of cumulative inflation can be negative in periods of negative inflation (deflation). If pension benefit payments are not to be reduced under deflation, then enter 0 as the value of this parameter.

Consider, for example, a scenario in which the baseline valuation date is 1/1/2014 and the pension increase will be 75% of cumulative inflation for years through 2015 (that is, for the first two years of the forecast period) and equal to the inflation rate thereafter, with a 3% limit all years and an average 2% pension increase already reflected in valuation liabilities. Then enter

From	To	Fraction of Cumulative Inflation	Maximum Additional Pension Increase
--	2014	0.75	0.03
2015	--	1.00	0.03

ProVal fills in the To column automatically, and the last value will be used for the last year entered and all years thereafter. Note that the From box in the first row cannot be completed. Our example involved only two ranges of years for entering pension increase information: if you assume differing fractions over the forecast years, you may need to press the ENTER key, to create a new row, when you get to the bottom of the spreadsheet.

You may choose to have pension increases that, relative to inflation, will be level over the forecast period, by selecting the Constant rate option and then specifying the Fraction of cumulative inflation that will be granted at each (future) forecast valuation date. Under this option, ProVal keeps track of the cumulative inflation and then grants an additional pension increase that, relative to inflation, will not change over the forecast period. The pension increase granted will be the specified percentage of cumulative inflation up to the current forecast valuation date. For example, enter a value of 0.75 if the pension increase granted should be 75% of cumulative inflation, or enter 1.0 if the pension increase granted is equal to cumulative inflation up to that point. Pension increases are presumed granted each year, starting with the year beginning on the baseline Valuation Date of the forecast (aka the baseline year).

You must enter a Minimum increase and may also choose to apply a Maximum increase (if any). For both parameters, entries are made in the manner indicated above for variable pension increases. If you wish to value a pension increase that is a constant percentage, irrespective of inflation, set the value of the Fraction of cumulative inflation parameter to zero and set the Minimum increase parameter value equal to the desired constant percentage. If pension benefit amounts are not to be decreased under deflation, then enter a value of 0 for the Minimum increase.

To grant constant rate pension increases less frequently than annually, check the Grant less often than annually box. When this option is used, ProVal keeps track of the cumulative inflation, from the later of the initial valuation year and the year of the most recent grant, and then gives the specified percentage of that cumulative inflation in the year specified.  Enter in the text field for the First year of grant parameter, the first year during which a pension increase based on experience inflation will be granted, and valued (for example, 2014, if the first grant year is the year beginning on the valuation date anniversary in the year 2014). Enter also the number of years between grants, in the text field of the Frequency thereafter: Every n years parameter. For example, enter a value of 2 to grant a pension increase every other year; the increase in the pension amount will be determined as the ratio of the compound value of inflation up to the current forecast year over the lesser of the compound value up to 2 years prior or the compound value since decrement. Note that if you enter a value of 1, then pension increases will be granted every year, but starting with the year entered for the First year of grant parameter, not with the baseline year of the forecast. Likewise, if you enter a value of 0, a pension increase will be granted just once, in the year beginning on the valuation date anniversary in the year entered as the First year of grant.