Cost-of-Living Adjustments (COLAs)

Pension modes except U.K.

The parameters of the Cost-of-Living Adjustments (COLAs) topic specify the assumed rates of increase (or perhaps decrease) in annual pension benefit applied after decrement from active status to reflect, typically, cost-of-living adjustments, although COLAs can be used to model other provisions that increase pension amounts only after decrement. As such, COLAs differ from increase and crediting rates, which can be applied before decrement from active status. COLAs also differ from increase rates in that increase rate tables vary by calendar year only, whereas COLA rate tables may have age, sex and duration dimensions, as discussed below.

In the Canadian registered pension mode, up to three separate valuation assumption COLA sets may be specified: one for Ongoing Liability and two for Solvency Liability (Transfer Value basis and Annuity Purchase basis). Therefore, in this mode, there are two Cost-of-Living Adjustments topics under the Valuation Assumptions command: one under the Ongoing Liability heading and one under the Solvency Liability heading, where you specify, separately, the COLAs that apply for valuing solvency liability on the transfer value and annuity purchase bases. (In all other pension modes, there is a single Cost-of-Living Adjustments topic, under which a single assumption is specified for valuing all types of liabilities.)

For a Core Projection, the COLA assumption for experience (during the period between the initial valuation date and each future valuation date) is specified under the Increase & Crediting Rates topic of Projection Assumptions.

Depending on their nature, restrictions upon application of COLA rates may be specified 1) under the Inactive Benefit Defintion, for inactive plan members, and under the Benefit Definition, for active members (or vested members valued as active), or 2) in these Valuation Assumptions, by completing an advanced COLA expression (discussed below). Restrictions that may be specified within an inactive or active benefit, other than limiting each year’s COLA to a flat dollar amount, are restrictions on the resulting total annual pension payment (such as a minimum benefit amount and stopping COLA application once a maximum benefit amount is reached, including a US IRC section 415 maximum benefit or, in Canadian registered mode, an ITA maximum pension). Restrictions that may be specified within an advanced COLA expression, on the other hand, pertain to the COLA amount, not to the resulting total benefit payment.

Note that parameter settings of the Census Specifications (for inactive members) and the Plan Definition (for active members and vested members valued as active) impact the application of assumed COLAs specified in Valuation or Projection Assumptions, as follows:

COLAs will be applied to a benefit only if the Apply COLAs from assumptions box is checked in the relevant Inactive Benefit Definition or active Benefit Definition.
You may choose to apply COLAs to some, but not all, plan benefits by checking the Apply COLAs from assumptions box for some Inactive Benefit Definitions or active Benefit Definitions, and not others.
COLAs specified in the Valuation Assumptions will be applied to value a lump sum factor Benefit Formula Component only if the Use valuation/projection assumption COLAs box, accessed by means of the Advanced button of that lump sum factor component library entry, is checked.
If both a Benefit Definition COLA and a lump sum factor Benefit Formula Component COLA are specified, the lump sum factor value (in the benefit payment amount) will reflect the lump sum COLA and the values of the Benefit Definition’s Payment forms will reflect the Benefit Definition COLA.
The Benefit payment frequency and Annuity payment timing parameters in the Plan Attributes topic of the Plan Definition are taken into account when applying the COLA timing parameters (discussed below).

Different COLA rates may be applied after decrement and prior to benefit payment commencement (that is, during a deferral period, for a benefit with deferred commencement of the payment form) and once benefit payment has commenced (during the payment period of the benefit). ProVal determines the payment commencement date according to the payment form parameters indicated by the Inactive Benefit Definition or active Benefit Definition.

The COLA rate during payment period is used to index benefits after payment has commenced. Select the Constant option to specify a single COLA rate to apply to all years after payments start. If the plan does not have a payment period COLA, then enter zero as the COLA rate. Enter the COLA rate as a number (not as a percentage). Select the Variable option to access COLA rate tables that have been entered under the Reference Tables command of the Input menu, or to specify COLA rates that may vary according to the contents of a coded database field, and/or are based on the calendar year associated with the payment date. Select from the list of all COLA rate reference tables in the current Project or click the button to create a new table. COLA rate tables for payment periods may vary by age, sex, and duration (time elapsed) since the commencement of payments. Note, however, that COLAs that vary by coded database field currently are not supported for lump sum factor Benefit Formula Components.

Note that, for a simple COLA applied to a benefit that has a Post-Decrement Death Benefit payment form, an advanced COLA expression (discussed below) must be used. An advanced COLA expression also is needed for a compound COLA applied to a benefit that has a Post-Decrement Death Benefit payment form if the payment period COLA differs from the deferral period COLA and application of the payment period COLA is to be deferred to the later of the commencement age specified for the spouse's benefit and the member death age. Without an advanced expression, the payment period COLA will be applied at the fixed spouse commencement age specified in the payment form, regardless of whether the member has died by then. (If a fixed commencement age is not specified, so that the spouse's annuity starts immediately upon the member's death, then the payment period COLA will be applied at the spouse commencement age, which is the same as the decrement age.)

The COLA rate during deferral period is used to index benefits from the decrement date up to the payment commencement date. Select the Constant option to specify a single COLA rate to apply all years before payments start. If the plan does not have a deferral period COLA, then enter zero as the COLA rate. Enter the COLA rate as a number (not as a percentage). Select the Variable option to access COLA rate tables that have been entered under the Reference Tables command of the Input menu, or to specify COLA rates that may vary according to the contents of a coded database field, and/or are based on the calendar year associated with the deferral date. Select from the list of all COLA rate reference tables in the current Project or click the button to create a new table. COLA rate tables for deferral periods may vary by age and sex. Note, however, that COLAs that vary by coded database field currently are not supported for lump sum factor Benefit Formula Components.

In German mode only, check the box Apply only to post-1/1/2018 portion of the benefit to apply the deferral period COLA between first and second decrement only to the portion of the benefit earned after 1/1/2018. This portion is determined using the vesting service earned up to the first decrement (which is assumed to happen in the middle of the year). If the benefit is deferred past the second decrement, that is past retirement (normally done only if decomposing an immediate retirement benefit into a temporary and deferred benefit), this checkbox will be ignored during the period from second decrement to benefit commencement, and the COLA will be applied to the entire benefit during that period. This checkbox only affects how we apply the COLA between first and second decrement.

The Parameters button to the right of the list of tables and table options, for payment period and deferral period COLAs, respectively, appears dimmed unless the option to vary according to the contents of a coded database field and/or by calendar year is selected for a payment period or deferral period COLA assumption. Clicking a Parameters button will access additional parameters for these options. See Additional COLA Parameters for details.

Rate type indicates whether Compound interest (geometric), Simple interest (arithmetic) or Advanced interest (defined by expression) COLAs apply. If next year’s annual pension amount is determined by applying the COLA rate to this year’s pension amount (the typical application of COLAs), then the COLA is compound, whereas a simple COLA applies the COLA rate for all years (for both the deferral period and the payment period) to the initial annual pension amount determined at the date of decrement from active status. If, however, next year's annual pension amount is determined by a more complicated relationship that requires the age or year of payment (or deferral), the age or year of commencement, etc., select the Advanced rate type and click the Expression button, to enter the formula for the annual increase (or decrease) in the benefit amount. For a benefit with a post-decrement death benefit payment form, the Advanced type must be used to specify a simple COLA and, in some situations, is needed to specify a compound COLA. For more information about COLA Expressions, see COLA Expression Operators. Note that if either a simple COLA is selected or an advanced COLA expression is entered that makes use of the #DECBEN operator, you must also specify for inactive members, under the Inactive Benefits subtopic of the Inactive Data topic of the Census Specifications, the database field containing the amount of the annual pension as of the decrement date (that is, the initial benefit amount). Also note that a lump sum factor Benefit Formula Component cannot reference a COLA expression: if a lump sum component's underlying annuity payment form has a COLA applied, a compound or simple rate type must be specified as an override COLA for the lump sum component (see the discussion below of the Benefit & Lump Sum Overrides button). In German mode and for benefits commencing at post-termination retirement age, the in-deferment COLA is always treated as compound when applied between termination and retirement (or other 2nd decrement in German mode).

In a Core Projection, the COLA Rate type for each benefit and lump sum component and the Advanced parameters for each benefit are inherited from Valuation Assumptions and cannot be changed for experience COLAs over the projection period; if these parameters differ between funding and accounting assumptions, the Core Projection will abort. In the Canadian registered mode, the valuation assumption COLA Rate type specified for ongoing liability is inherited for experience COLAs over the projection period (and the valuation assumption Rate type specification for transfer value and annuity purchase solvency liabilities is ignored).

The COLA increases occur annually parameter allows you to specify the timing of the COLA within each post-decrement year. Select the at end of year option to apply the COLA at each valuation date anniversary. Select the at constant date option to apply the COLA on a fixed month and day each year. Select the at month and day from database field option to specify a different month and day for each participant (the year in that field will be ignored). Select the same as valuation COLA option to apply the COLA timing specified in the main valuation assumptions to the selected override. In determining the first payment to which the COLA will be applied, both the payment frequency and the payment timing (as specified under the Plan Attributes topic of the Plan Definition) will be taken into account. For example, if the valuation date is January 1, the payments occur at the end of each quarter and the COLA date is May 15, the COLA will be applied to the second and subsequent payments of each year (that is, to 0.75 of the payments in the year). In that case, if the benefit is $1,000 at the beginning of the year and the COLA rate for that year is 3%, the payment for the year will be set using a simple weighted average: (0.25 * $1,000) + (0.75 * $1,030) = $1,022.50. In German mode and for benefits commencing at post-termination retirement age, the COLA is always assumed to occur at the end of the year when applying in-deferment COLA between termination and retirement (or other 2nd decrement in German mode). The COLA timing parameters are applied to all benefits and all liability calculations. The COLA timing specified under the Ongoing Liability Cost-of-Living Adjustments (COLAs) topic is applied to the solvency annuity purchase and solvency transfer value liabilities, in addition to the ongoing liability. Similarly, in a Core Projection, the COLA timing is inherited from the Valuation Assumptions and cannot be changed for experience COLAs over the projection period; if these parameters differ between funding and accounting assumptions, the Core Projection will abort. The COLA timing parameters will not affect the calculation of lump sum factor Benefit Formula Components.

In German mode, COLA timing on active (and terminated vested) retirement benefits is measured from anniversaries of each retirement decrement date rather than anniversaries of valuation dates. For example, for a retirement on April 1, a COLA date of June 30 will fall 0.25 years after each retirement anniversary, and the COLA will be applied to the 4th and subsequent payments each year. If you check the box For retirement decrement, use retirement anniversary instead, ProVal will effectively ignore any COLA date for retirement benefits, and apply COLA increases on anniversaries of retirement decrement dates, and the benefit amount will remain constant during each full year from retirement.

In German mode, select the every X years, starting option to indicate that the COLA will be applied every X years. This option is available only if using a constant compound interest rate. The rate entered for the payment period will be compounded over X years and applied every X years. The COLA increases during the deferral period will still be applied on an annual basis. Select the X years from date of commencement option to apply the first COLA increase X years from the date of commencement. Select the at constant date option to apply the first COLA increase on a fixed date. Select the at date from database field option to apply the first COLA increase on a different date for each participant. Check the reduce first increase if occurs less than X years from date of commencement box to reduce the first increase based on the rounded number of months from commencement to the first increase date.

Generally, the COLAs for all benefits (Inactive Benefit Definitions and active Benefit Definitions), and for all lump sum factors whose Apply COLAs from assumptions box is checked, will be governed by the assumptions specified in the “main” dialog box for the Cost-of-Living Adjustments topic of these Valuation Assumptions. If you wish to override this treatment, click the Benefit & Lump Sum Overrides button, which provides access to the COLA Benefit and Lump Sum Overrides dialog box, by means of which you may specify different COLA rates for some benefits and lump sum factors (but only for lump sum factors with a check in the Use valuation/projection assumption COLAs box). A check mark on the Benefit & Lump Sum Overrides button indicates that an override COLA assumption has been entered for at least one active or inactive member benefit or at least one lump sum factor. (Note: a check mark may be displayed also if a benefit or lump sum factor with an override applied is edited to no longer apply COLAs.)

There are three tabs in the COLA Benefit and Lump Sum Overrides dialog box: one for Active Benefits, one for Inactive Benefits and one for Lump Sum Components. To specify a different COLA assumption, for a particular benefit or lump sum factor, from that specified in the “main” dialog box for the Cost-of-Living Adjustments topic, click the appropriate tab and then Select an active benefit from the list of Benefit Definitions (Active Benefits tab), Select an inactive benefit from the list of Inactive Benefit Definitions (Inactive Benefits tab) or Select a lump sum factor from the list of lump sum factor Benefit Formula Components (Lump Sum Components tab). Note that only the library entries unhidden in the current Project appear in the lists. Furthermore, for an active Benefit Definition, Inactive Benefit Definition or lump sum factor Benefit Formula Component to appear in the list, the Apply COLAs from assumptions box of the active Benefit Definition or Inactive Benefit Definition must be checked or the Use valuation/projection assumption COLAs box behind the Advanced button of the lump sum factor Benefit Formula Component must be checked.

On the Active Benefits tab or the Lump Sum Components tab, you may select a Plan Filter (in German mode, a Promise Filter), from the drop-down list, to reduce the list of possible choices to those Active Benefits (in German mode, Active/TV Benefits) or Lump Sum Components, respectively, associated with a particular Plan Definition (or in German mode a particular Benefit Promise). On the Inactive Benefits tab, you may select a Census Specifications Filter from the drop-down list, to reduce the list of possible choices to those Inactive Benefits associated with a particular set of Census Specifications. Please see Filters for details. Note that a check mark will appear on the Benefit & Lump Sum Overrides button if an override COLA has been specified, regardless of whether the benefit or lump sum component with an override COLA has been filtered from view.

If both a active Benefit Definition COLA override and a lump sum factor component override are specified, the lump sum factor value (in the benefit payment amount) will reflect the lump sum COLA override and the value of the Benefit Definition’s Payment Form will reflect the Benefit Definition COLA override.

If a COLA assumption override is entered for a Benefit Definition whose Benefit formula contains a lump sum factor Benefit Formula Component, that component will attempt to inherit the Benefit Definition's override during processing; to maintain consistency, you must either provide a separate COLA assumption override for that lump sum factor component (Lump Sum Components tab) or override the COLA assumption for all other Benefit Definitions referencing that lump sum factor component (Active Benefits tab), using the same COLA specifications for all the Benefit Definitions referencing the lump sum factor. That is, a lump sum factor’s COLA assumption override, if not specified directly, must be specified identically for all Benefit Definitions. Furthermore, lump sum factors cannot apply advanced COLA expressions; lump sum factor COLA assumption overrides must be specified so that the lump sum factor COLA assumptions are compound or simple.

In Canadian registered mode, solvency liability COLA assumption overrides (either on the transfer value basis or the annuity purchase basis) may be entered for active death and disability benefits. Although solvency liabilities do not include these benefits while active, solvency liabilities do include these benefits for emerging inactive deaths and disablements in a Core Projection.

To enter the desired COLA override rate(s) for selected benefits or lump sum components, click the Edit button and complete the parameters of the next dialog box. The available parameter options are the same as in the “main” dialog box for the Cost-of-Living Adjustments topic with the addition of the +/- valuation assumption sensitivities applicable parameter. Only COLA overrides allow you to check the + / - valuation assumption sensitivities applicable box to apply the sensitivity specified (if any) in the Valuation. (The +/- sensitivities are always applied to the COLA specified on the main dialog box whenever the COLA sensitivities are selected under the Sensitivities button of a Valuation).