Cost-of-Living Adjustments
If active (or vested members valued as active) receive pension benefits subject to a COLA (that is, an increase, or perhaps decrease, in the benefit amount for years after the year of decrement), checking the Apply COLAs from assumptions box of a Benefit Definition and clicking the COLA Limits button leads to the Cost-of-Living Adjustments (COLAs) dialog box, which provides parameters to restrict the COLA amount that applies to this particular Benefit Definition.
Generally, the Payment form selected for this Benefit Definition must be an annuity type. ProVal supports COLAs applied to a Post-decrement Death Benefit (e.g., for U.S. qualified plans, a REA benefit), if the COLA rate is compound interest, rather than simple interest. If you associate a simple COLA with a post-decrement death benefit, the Valuation or Core Projection will be aborted (use an advanced COLA expression instead).
COLAs generally will not apply to benefits paid on a lump sum Payment form regardless of whether the Apply COLAs from assumptions box is checked. One exception is a Benefit Definition with a lump sum Normal form and a lump sum factor Benefit Formula Component contained in the Benefit formula; COLAs specified by parameters within the lump sum factor will be applied – to the annuity underlying the lump sum factor value, thus impacting the amount computed by the Benefit formula (rather than directly to the value of the annuity payment form of the Benefit Definition) – even if the Apply COLAs from assumptions box of the Benefit Definition referencing the lump sum factor is not checked. Another exception is a Benefit Definition with a lump sum Optional form and an annuity Normal form. In that case, any COLA applied to the annuity normal form will be included in the annuity present value that is computed for the lump sum optional payment amount. (Note that neither exception, however, involves increasing the lump sum amount itself by a COLA; COLAs applied to lump sums always pertain only to the underlying annuity.)
Note: If you associate a COLA with a Benefit Definition’s lump sum Normal form or Optional form, the COLA will be ignored and a warning will be issued upon execution of a Valuation or Core Projection that references COLAs applied to these payment forms. (Again, a COLA will be honored if applied to the annuity underlying the present value calculation for a lump sum optional payment form or if applied to the underlying annuity in a lump sum factor Benefit Formula Component.)
If the following parameters of this dialog box (limiting the annual benefit increase or the total benefit amount, or applying a minimum benefit) are not completed, ProVal will apply the cost-of-living adjustments (COLAs) specified under the Cost-of-Living Adjustments topic of Valuation Assumptions and the Increase & Crediting Rates topic of Projection Assumptions without restriction. These parameters are ignored in German mode and for benefits commencing at post-termination retirement age when applying an in-deferment COLA between termination and retirement (or other 2nd decrement in German mode). If the assumptions specify an advanced COLA expression, note that the expression (which pertains to the COLA amount, rather than to the total pension benefit amount) will be applied first, prior to any further adjustment for any parameter values specified here.
If the Limit annual increases to box is checked, ProVal will apply the COLAs specified in the assumptions but limit the annual increase in the pension benefit to the Flat dollar amount specified in the text field. For example, if your plan provides a 3% COLA on the first $12,000 of annual pension, then enter the dollar limit of 360 (that is, 12,000 multiplied by .03) as the flat dollar amount.
If a box is checked under No increases once benefit exceeds, ProVal will apply the COLAs but limit the resulting annual pension to the amount determined by your choice of option. Thus you may code, for years after the year in which the decrement from active status occurs, limits on the annual pension such as “x times the benefit amount at decrement”, “x% of final average salary at decrement”, or “$x plus the benefit amount at decrement”. You may select more than one option, in which case the total pension amount, as of each date subsequent to the decrement date, will be limited to the smallest amount produced by the options. The options are:
x benefit at decrement, to limit the total annual pension to the specified multiple of the initial benefit amount, as determined by the Benefit formula as of the decrement date. Enter the multiple in the text box; for example, enter 1.3 if the annual pension is not allowed to exceed 1.3 times the initial benefit amount.
415(b) maximum benefit at decrement (U.S. qualified, U.S. public and universal modes) or ITA Maximum Pension at decrement (Canadian registered mode), to limit the total annual pension to the U.S. Internal Revenue Code (IRC) Section 415 limit or the Canadian ITA maximum pension, evaluated as of the decrement date.
If neither of these two options (alone or in combination) completely describes your plan’s restrictions on COLAs, Benefit formula at decrement allows you to limit the total annual pension to the amount determined by the benefit formula specified here, evaluated as of the decrement date. Limits such as “x% of final average salary at decrement” and “$x plus the benefit amount at decrement” and a flat dollar maximum pension amount are typical of what can be coded, using the same Benefit Formula Components that are available for the Benefit formula of the Benefit Definition. If you also wish to limit each year’s total pension payment to a multiple of the initial benefit amount and/or to either the U.S. IRC Section 415(b) limit at decrement or the Canadian ITA maximum pension amount at decrement, then check both the Benefit formula at decrement box and the other relevant box(es), which are described in the preceding bullets. Click the Component Library button to access the Benefit Formula Component library and create, unhide and/or edit Benefit Formula Components.
If both the Limit annual increases to box and at least one No increases once benefit exceeds box are checked, then both the amount of annual pension increase and the total pension amount as of each date subsequent to the decrement date will be limited. Note that ProVal will not limit the initial benefit amount as of the decrement date, determined by the parameters of the Benefit formula section of the Benefit Definition and either the 415(b) Maximum Benefit Limit section or the ITA Maximum Pension section, if the initial amount is greater than the limited pension amount determined by the COLA parameters.
If your plan has a Minimum benefit, check the Benefit formula at decrement box and enter the benefit formula that determines the minimum total annual pension amount as of the decrement date. This minimum benefit is applied after any COLA assumption increase and after any limit applied (by the above Limit annual increases to parameter) to the annual benefit amount. You may use the same Benefit Formula Components that are available for the Benefit formula of the Benefit Definition. Please note that ProVal does not increase this Minimum benefit by the COLA assumption. Click the Component Library button to access the Benefit Formula Component library and create, unhide and/or edit Benefit Formula Components.