QUESTION: I have a plan that provides a benefit of $15 per month for all years of service, negotiated to increase on 1/1/2011 to $20 per month for all years of service. The plan year is the calendar year, the valuation date is 1/1/2010 and my attribution method is accrual rate proration for both projected unit credit and unit credit liabilities. How should I code the scheduled benefit increase? What if the benefit level increase occurs at 7/1/2010?

ANSWER: There are many ways to code flat dollar plans in ProVal. The "correct" way depends in part on how you choose to reflect negotiated changes in benefit levels in your liabilities. This article explains how changes in benefit levels are reflected in various unit credit and projected unit credit liabilities under different coding options.

This article will cover modeling benefit level changes using new rates, custom attribution and/or increase rates. Note that increase rates are still required to reflect plan amendments during a forecast (see Projecting multiple plan amendments, example 1 and Projecting multiple plan amendments, example 2). Our Technical Reference article entitled PUC and UC Attribution contains details of ProVal’s methodology for computing accrued liability and normal cost. For U.S. qualified plans with benefit level changes occurring during the plan year (but not on the first day of the plan year), see also the Frequently Asked Questions article about a mid-year change in benefit level for a U.S. qualified plan.

Discussed below are three alternative results:

1. Reflecting the benefit increase entirely in the normal cost for both the projected unit credit and pure unit credit cost methods.

2. Reflecting the benefit increase in both the accrued liability and the normal cost for the projected unit credit cost method but entirely in the normal cost for the pure unit credit cost method.

3. Reflecting the benefit increase in both the accrued liability and the normal cost for both the projected unit credit and the pure unit credit cost methods.

Result 1: Reflect the benefit increase entirely in the normal cost for both the projected unit credit and pure unit credit cost methods.

Option 1: Increase the accrual rates

Benefit Formula Components to define:

"Option1", which is an accrual definition with rates that change from 15 to 20 as of 1/1/2011

Benefit Formula Component Library:				Pension
Name:				Option1
Description:				$15/month pre2011, $20/month post2011
Component type:				Accrual definition
Accrual format:				Final average [basis x (sum of rates)]
Basis formula:				12
Accrual Rates:
	Rate Type:			Varies by years of service
	From	Up to	Rate
	0	-	15
New rates as of:
	Effective Period:			1/1/2011
	From	Up to	Rate
	0	-	20
Apply rates to:				All years

Under the accrual rate proration attribution method that you selected, accrual definitions are prorated by the ratio of cumulative accrual rates as of the valuation date to cumulative accrual rates at decrement. Because the cumulative rates as of the valuation date do not reflect the negotiated increase in the benefit level, the projected unit credit and unit credit accrued liabilities will not reflect future benefit increases. The entire change in the benefit level is reflected in the normal cost. (Our example is for a component with a final average format, but this is true also if the component has a career average format and the "expected value" option is selected under the Accrued Benefit topic.)

Result 2: Reflect the benefit increase in both the accrued liability and the normal cost for the projected unit credit cost method but entirely in the normal cost for the pure unit credit cost method.

There are two options that produce this result. The first, Option 2a, uses increase rates in the accrual basis. The second, Option 2b, specifies the multiplier directly in the rates and uses custom attribution to obtain the desired results.

Option 2a: Apply increase rates to the accrual basis (use this option to model plan amendments in a forecast)

Benefit Formula Components to define:

"Option2a", which is an accrual definition with rates of 15 and an accrual basis with increase rates applied

Benefit Formula Component Library:				Pension
Name:				Option2a
Description:				$15/month pre2011, $20/month post2011
Component type:				Accrual definition
Accrual format:				Final average [basis x (sum of rates)]
Basis formula:				12 * IncreaseFactor
Accrual Rates:
	Rate Type:			Varies by years of service
	From	Up to	Rate
	0	-	15

Accrual Basis Components to define:

IncreaseFactor

Accrual Basis Component Library:	Pension
Name:	IncreaseFactor
Description:	Increase $15 to $20 starting in 2011
Component type:	Constant
Value:	1
Apply increase rates to this component?	Yes

(Note that, alternatively, the factor of 12 could be subsumed into the component named IncreaseFactor.)

Valuation Assumptions to define:

Under the Increase & Crediting Rates topic, code the increase rates as a table containing 0.33333 (i.e., 20/15 – 1) for 2010 (the year prior to the year of the benefit change) and 0 for all other years, as follows:

From	To	Rate
--	2009	0
2010	2010	0.33333
2011	--	0

Similarly, you could code the benefit as the product of two Benefit Formula Components, “Option2a” and “Constant”. The first component is an accrual definition with a basis of 12 and rates of 15 (no increase rates applied). The second component is a constant with a value of 1 and increase rates applied. Writing the formula this way is more convenient for modeling separate funding and accounting approaches with a single Plan Definition (see the discussion at the end of this article about combined approaches).

Under the above approach, except for benefits limited by the U.S. Internal Revenue Code section 415 (typically limited in the U.S. qualified mode), PUC accrual rate proration attribution is the same as linear attribution. This is a consequence of the fact that there is no change in the rates under the Accrual Rates topic either upon completion of a particular number of years of service or at a future date.

Different results are produced for projected unit credit and unit credit liabilities because the projected unit credit cost method prorates projected benefits (by the ratio of cumulative accrual rates as of the valuation date to cumulative accrual rates at decrement), whereas the unit credit cost method values accrued benefits (as of the valuation date and one year after). Therefore, the projected unit credit accrued liability reflects future benefit increases, but the unit credit accrued liability does not. The unit credit normal cost will reflect the entire increase in the benefit level.

Option 2b: Custom projected unit credit attribution

Benefit Formula Components to define:

"Option2b", which is an accrual definition with rates that change from 15 to 20 as of 1/1/2011 and custom attribution utilized

Benefit Formula Component Library:				Pension
Name:				Option2b
Description:				$15/month pre2011, $20/month post2011
Component type:				Accrual definition
Accrual format:				Final average [basis x (sum of rates)]
Basis formula:				12
Accrual Rates:				12
	Rate Type:			Varies by years of service
	From	Up to	Rate
	0	-	15
New rates as of:
	Effective Period:			1/1/2011
	From	Up to	Rate
	0	-	20
Apply rates to:				All years

Then, under the Custom Attribution topic, enter 1 for all years for projected unit credit accrual rate proration (only, i.e., not for pure unit credit accrual rate proration), as illustrated:

Projected unit Credit Attribution
	PUC Attribution Rate Type:			Varies by years of service
	From	Up to	Rate
	0	-	1

Under the above approach, except for benefits limited by the U.S. Internal Revenue Code section 415 (typically limited in the U.S. qualified mode) PUC accrual rate proration attribution is the same as linear attribution. This is a consequence of the fact that there is no change in the attribution rates either upon completion of a particular number of years of service or at a future date. The pure unit credit liabilities are calculated as for Option 1. Therefore, the projected unit credit accrued liability reflects future benefit increases, but the unit credit accrued liability does not. The unit credit normal cost will reflect the entire increase in the benefit level.

Result 3: Reflect the benefit increase in both the accrued liability and the normal cost for both the projected unit credit and the pure unit credit cost methods.

Again, there are two options to obtain this result. The first, Option 3a, uses increase rates. The second, Option 3b, specifies the multiplier directly in the rates and uses custom attribution to obtain the desired results.

Option 3a: Table with increase rates (use this option to model plan amendments in a forecast)

Benefit Formula Components to define:

1. "Option3a", which is an accrual definition with rates of 15 and no increase rates applied. This component is identical to "Option2a", except that the Basis formula is just “12”.

2. “Table”

Benefit Formula Component Library:	Pension
Name:	Table
Description:	table of ones with increase rates
Component type:	Table
Table:	table - one
Advanced button:
	Look up table values using projected age & service, except:
	No exceptions
Apply increase rates to this component?	Yes

Benefit Component Tables to define:

“Table – one”

This is a table with all values equal to 1.

Because of the “no exceptions” selection, ProVal will not freeze the table’s accrued benefit value as of the valuation date for unit credit attribution. Therefore the unit credit accrued liability reflects future benefit increases (as does the projected unit credit accrued liability).

Under the Increase & Crediting Rates topic of Valuation Assumptions, specify the increase rates in the same manner as for Option2a.

Option 3b: Custom projected unit credit and pure unit credit attribution

Benefit Formula Components to define:

"Option3b", which is an accrual definition with rates that change from 15 to 20 as of 1/1/2011 and custom attribution utilized

This component is identical to "Option2b" except for the custom attribution.

Under the Custom Attribution topic, enter 1 for all years for both projected unit credit and pure unit credit accrual rate proration, as illustrated:

Projected unit Credit Attribution
	PUC Attribution Rate Type:			Varies by years of service
	From	Up to	Rate
	0	-	1
Pure unit Credit Attribution
	PUC Attribution Rate Type:			Varies by years of service
	From	Up to	Rate
	0	-	1

Under the above approach, except for benefits limited by the U.S. Internal Revenue Code section 415 (typically limited in the U.S. qualified mode), accrual rate proration attribution is the same as linear attribution for UC as well as for PUC. This is a consequence of the fact that there is no change in the attribution rates either upon completion of a particular number of years of service or at a future date. Therefore both the projected unit credit accrued liability and the unit credit accrued liability reflect future benefit increases (as does the normal cost).

U.S. Qualified Plans

For U. S. plans required to reflect benefit increases that occur within the current valuation year in their target liabilities (see IRS Regulation §1.430(d)-1 for details), this can be accomplished using either Options 3a or 3b, or a third alternative. There is a Reflect new accrual rates during the valuation year in PUC and UC liabilities check box under the Liability Methodology topic of Valuation Assumptions. If this box is checked, any new accrual rates that are effective in the upcoming valuation year (i.e., the year beginning on the valuation date) and applicable to all years of service will be reflected in the PPA liabilities. Using this option allows you to set up “new rates as of” in your Benefit Formula Component without setting up any increase rates or custom attribution. This check box applies only to plan changes that occur during the valuation year; for plan changes effective at a later date and additional information, further discussion can be found in the Frequently Asked Questions article about a mid-year change in benefit level for a U.S. qualified plan.

Summary

The chart below is a summary of results under the above options for our sample valuation. Option 0, the base case, is a plan that provides a benefit of $15 per month for all years of service and no negotiated changes in benefit level. The other options assume a plan with a current benefit, at 1/1/2010, of $15 per month for all years of service, increasing at 1/1/2011 to $20 per month for all years of service.

Output Variables	Option 0: Base Case	Option 1: PUC/UC benefit increase in NC only	Options 2a & 2b: PUC benefit increase in accrued liability/UC increase in NC only	Options 3a & 3b: PUC/UC benefit increase in accrued liability
Projected Unit Credit Liability	6,040,900	6,040,900	7,501,600	7,501,600
Projected Unit Credit Normal Cost	363,500	1,945,400	484,600	484,600
Pure Unit Credit Liability	6,040,900	6,040,900	6,040,900	7,501,600
Pure Unit Credit Normal Cost	363,500	1,945,400	1,945,400	484,600
RPA Current Liability	6,808,600	6,808,600	6,808,600	8,491,500
RPA Current Liability Normal Cost	422,100	2,245,600	2,245,600	562,700
ABO	6,040,900	6,040,900	6,040,900	7,501,600
ABO Normal Cost	363,500	1,945,400	1,945,400	484,600
PBO	6,040,900	6,040,900	7,501,600	7,501,600
PBO Normal Cost	363,500	1,945,400	484,600	484,600

 

What if I want a combination of Options 2 and 3 but want to code only one Plan Definition?

You may want to value a combination of options 2 and 3. For accounting purposes, Option 3 will produce an ABO equal to the PBO. However, for current liability calculations for a U.S. qualified multiemployer plan (or for a single-employer plan not subject to the funding requirements of IRS Regulation 1.430(d)-1), depending on the alternative you select to satisfy the Internal Revenue Code section 412 as clarified by the 1995 IRS Gray Book question #6, you may wish to use Option 1 or Option 2, which reflect the negotiated benefit increase entirely in current liability normal cost.

To accomplish this combination in one Plan Definition, create a benefit formula that contains the product of three Benefit Formula Components, e.g., “Benefit * Constant * Table”. Benefit is an accrual definition with a basis of 12 and rates of 15. Constant is a constant type of component with a value of 1 and increase rates applied. Table is a table type of component in which all values are 1, increase rates are applied and the "no exceptions" radio button is selected behind the Advanced button of this component.

In your funding assumptions, apply the table of increase rates to the constant component and apply increase rates of 0 to the table component. In your accounting assumptions, apply the table of increase rates to the table component and apply increase rates of 0 to the constant component.

The results under this coding combination are:

Output Variables	Combination of Options 2 and 3
Projected Unit Credit Liability	7,501,600
Projected Unit Credit Normal Cost	484,600
Pure Unit Credit Liability	6,040,900
Pure Unit Credit Normal Cost	1,945,400
RPA Current Liability	6,808,600
RPA Current Liability Normal Cost	2,245,600
ABO	7,501,600
ABO Normal Cost	484,600
PBO	7,501,600
PBO Normal Cost	484,600

What if I want to ignore the benefit increase for current liability calculations?

If you wish your 1/1/2010 valuation to reflect the benefit increase for ERISA calculations for the funding standard account but ignore the benefit increase in current liability calculations, run a separate Valuation that does not reflect the plan change (i.e. no new rates, no increase rates). Use the Overrides button in the Valuation Set to select this run for current liability calculations.