Forecast Analysis
The parameters of this topic pertain to deterministic and stochastic forecasts and have no effect on Valuation Sets.
Check the Calculate end of year additional contribution box to apply an employer contribution strategy, for each year of the forecast, to contribute the amount necessary to reach a funded ratio target for a particular liability at the end of the year. For example, in the U.S. qualified pension mode prior to the effective date of the funding rules of the Pension Protection Act of 2006 (PPA), in order to avoid an additional funding charge, the employer might want the plan to have a year-end asset value that is at least 90% of the gateway current liability. In the Canadian registered pension mode, the employer might want to have no unfunded solvency liability at the end of the year. If the box is checked, ProVal will compute both the annual employer contribution according to the setting of the contribution policy parameter (specified under the Contribution Policy topic) and the additional amount needed to meet the funded ratio target. (Both values are displayed as forecast output variables, “Employer Contributions” and “EOY Additional Contribution”, respectively.) When rolling assets forward to forecast valuation dates, ProVal reflects, in the development of asset values at the forecast valuation dates, an actual (i.e., experience) employer contribution that is the sum of:
the amount computed according to the Contribution Policy parameter,
for the baseline year of the forecast, the amount specified as the value of the Additional Contribution parameter of the Contribution Policy topic and, for later forecast years, the amounts specified as the values of the Additional Contributions parameter of the deterministic and stochastic assumptions, and
the amount of an end of year additional contribution needed to meet the funded ratio target.
Note that, except for the “PPA” law selection in U.S. qualified mode, although the employer contribution derived according to the Contribution Policy parameter and any amount specified by the Additional Contribution(s) parameter(s) are assumed payable according to the Fraction of year from Valuation Date to average date contributions are made parameter of the Contribution Policy topic, the end of year additional contribution to meet the target funded ratio is always assumed paid at the end of the plan year if the liability type is funding, and at the end of the fiscal year if the liability type is accounting. Note that you may cap the employer contributions (except for any additional amount specified by the Additional Contribution parameter) at a percentage of total payroll, by checking the Limit contribution to % of pay box of the Contribution Policy topic. For instance, in our U.S. example, use of this parameter can achieve the desired contribution levels if the employer wishes to avoid an additional funding charge but is unwilling or unable to contribute more than 10% of payroll in any given year.
Click the Parameters button to access the End of Year Additional Contribution Parameters dialog box, in which you select the desired funded ratio and type of liability and provide more information for computing the additional contribution to meet the target.
In the US qualified mode under a PPA law selection, if the Timing of contributions parameter of the Contribution Policy topic is set to pay quarterly contributions and final contribution when due, then the Pay quarterly based on 100% of prior year MRC box is accessible. Checking this box allows initial quarterly contributions to be based on the Minimum Required Contribution regardless of whether the prior year MRC exceeds 90% of the current year MRC. Specify how many quarterlies are assumed paid based on 100% of the prior year MRC: only the first, the first two, the first three or all four. Remaining quarterlies, if any, will be paid based on the lesser of 100% of the prior year MRC or 90% of the current year MRC. Also indicate how to reduce the remainder of the current year payments to handle an overpayment of quarterly contributions. For example, suppose two quarterly contributions were paid based on 100% of prior year MRC but 90% of current year MRC is the lesser amount. Select:
If the Use contribution timing to calculate interest on the receivable for funding assets (in first year) box is checked, the funding asset value at the end of the baseline year of a forecast (i.e., at the end of the year beginning on the baseline valuation date) will reflect interest on any receivable contributions made for the prior plan year (which contributions are included in the beginning-of-year funding asset value) from the assumed date of payment, instead of from the first day of the current plan year (baseline year). This parameter applies only to the first year of the forecast and is available (accessible) only if the value of the Fraction of year from valuation date to average date contributions are made parameter of the Contribution Policy topic does not exceed 1. This parameter is available in the U.S. qualified mode only if a contribution schedule (entered under the Contribution Policy topic) is not reflected; furthermore, if the applicable law selection is “PPA”, this parameter is not available if the Pay quarterly contributions and final contribution when due contribution timing option is selected. The purpose is to produce the same accounting and funding asset values at the end of the baseline year of the forecast, provided that the accounting Measurement Date is the same as the Valuation Date (both dates entered under the Initial Asset Values topic). ProVal will use the (accounting) contribution receivable (under the “PPA” law selection, discounted using the prior year effective interest rate, entered under the Prior Year Values topic) as the value of the receivable in the beginning of year funding assets. The assumed payment date of the prior year receivable contribution reflects the contribution timing indicated by the Fraction of year from valuation date to average date contributions are made parameter.
In OPEB mode, you may enter the assumed timing for experience benefit payments as the Fraction of year to average date experience payments are made. You may also override first year experience for plan year or fiscal year benefit payments and administrative expenses by checking the appropriate box and entering the desired override.
In pension modes, you enter the assumed timing for Experience benefit payments by benefit type: annuities (including all benefits that are not of type life insurance or lump sum), life insurance and lump sums. The entries must have a value between 0 and 1 and the default value is .5 (mid-year). You may override first year benefit payments for the plan year and fiscal year by checking the appropriate box and entering the desired overrides for each benefit type. Note if you do not have the benefit payments split by type, all the benefits may be entered in the Annuities bucket (with zeros entered for life insurance and lump sums) and will be valued with the timing entered for Annuities. You may also override first year experience for employee contributions and administrative expenses by checking the appropriate box and entering the desired override. The chart below details the override options:
| Plan year benefit payments (by benefit type) | Used for funding purposes and is measured as the period beginning on the Valuation Date |
| Fiscal year benefit payments (by benefit type) | Used for accounting purposes and is measured as the period beginning on the Measurement Date |
| Employee contributions (in modes other than OPEB and German) | Used for both funding and accounting purposes |
| Plan year administrative expenses | Used for funding purposes and is measured as the period beginning on the Valuation Date |
| Fiscal year administrative expenses | Used for accounting purposes and is measured as the period beginning on the Measurement Date |
In the US qualified, universal and Canadian modes, if the accounting methodology is ASC 715, you may select to Reflect settlement when lump sums exceed threshold and/or to Reflect curtailment for plan amendments in a certain year.
If the Reflect settlement when lump sums exceed threshold box is checked, ProVal will reflect a settlement when the projected experience lump sum benefit payments exceed the sum of service cost and interest cost. The settlement will be calculated as a percent of the following year’s (gain)/loss, where the percent is equal to the experience lump sum benefit payments divided by the sum of experience lump sum benefit payments and the following year’s PBO. If the fiscal year experience lump sum benefit payments are overridden in the first year, they will be used; otherwise ProVal’s calculated experience benefit payments will be used. Choose to include/exclude expenses when determining threshold to indicate if expenses should be included in service cost when calculating the threshold for settlement. If excluded, the threshold will be the accounting service cost plus interest cost less any expenses otherwise included in service cost.
If the Reflect curtailment for plan amendments in year box is checked, ProVal will reflect a full plan curtailment in the year indicated. The curtailment will cause all prior service cost and transition obligation bases to be recognized immediately. Any increase in PBO due to curtailment will first cause any unrecognized gain and transition asset to be recognized immediately, with any remaining amounts recognized in expense as a curtailment loss. Any decrease in PBO due to curtailment will first cause any unrecognized loss to be recognized immediately, with any remaining amounts recognized in expense as a curtailment gain. In order to calculate an increase or decrease in PBO due to curtailment, the Core Projection(s) referenced in the forecast must include Plan Amendments (specified in the Projection Assumptions) in the same year as the curtailment. The change in liability resulting from the Plan Amendments will be the increase or decrease in PBO. Note that this parameter does not consider partial curtailments; the change in PBO will be treated as a full curtailment (and not prorated), even if only a portion of future service or accruals is reduced. Check Change amort. basis to life expectancy (actives + inactives) if you want the amortization basis to change for amortizations which arise following the curtailment date. Otherwise the basis selected on the Accounting Methodology screen will continue to be used.
In the pension modes under Increases, amendments & funding method changes, tell ProVal whether the liability for any Additional COLAs, or Additional pension increases in U.K. mode, as specified by the Additional Plan Amendments topic of Deterministic or Stochastic Assumptions, are to be Amortized as a Plan change or as an experience Gain/loss. (Note that this choice pertains only to Additional COLAs or Additional pension increases; gains and losses arising from experience COLAs in Projection Assumptions that differ from Valuation Assumptions will always be treated as experience Gain/Loss.) Choosing Plan change here is appropriate for an “ad hoc” COLA (pension increase) that is granted but not provided for in the plan provisions. The liability for the additional COLA (pension increase) is amortized (as a plan change). The latter choice is appropriate if you wish to include an additional COLA (pension increase) that was not anticipated in Projection Assumptions at the time of running the Core Projection.
In the pension modes, also tell ProVal whether Additional COLAs, or Additional pension increases in U.K. mode, as specified by the Additional Plan Amendments topic of Deterministic or Stochastic Assumptions, are applied to just Benefits in pay status, i.e., benefit payments that have commenced as of the valuation date (baseline or forecast valuation date), or to All inactive benefits, i.e., benefit payments for any record with an inactive status, regardless of whether payments have commenced as of the valuation date. (Note that this choice does not affect the treatment of experience COLAs or pension increases specified in Projection Assumptions.) In most modes, ProVal determines whether benefit payments have commenced by reference to the inactive payment form defined in the Census Specifications (initial inactives) or the active payment forms defined in the Benefit Definition (emerging inactives), with all annuities assumed to be in pay status except for those with a deferred commencement date. In the U.S. qualified and universal modes, ProVal determines whether benefit payments have commenced by reference to the Benefits in receipt split based on parameter setting under the Benefits and Rounding topic. For example, if additional COLAs (or pension increases in U.K. mode) are applied only to benefits in pay status and the “payment form” option is specified for the benefits in receipt split, then additional COLAs (pension increases) will apply only to benefits with an immediate payment form (such as retirees), not to benefits with a deferred payment form (typically, vested terminated participants). If, instead, the “status code” option is specified for the benefits in receipt split, then additional COLAs (pension increases) will apply to the benefits of all inactive records except those whose status is mapped to the ProVal vested status – typically, to the benefits of inactive participants classified as retirees but not to the benefits of those classified as terminated participants with a vested right to a deferred pension.
Indicate the Amendment methodology to follow when determining the order of amortization base creation for a forecast year in which both plan benefit and assumption changes occur – that is, whether the plan change or the experience assumption change came first. Select the corresponding option: “value plan changes first” or “value assumption changes first”.
In pension modes, to switch the actuarial cost method to unit credit during the forecast period, check the box change actuarial cost method to unit credit and enter the applicable year. This is useful when the plan freezes at a future date and currently uses an actuarial cost method such as entry age. This option is only supported for individual cost methods.
Under Other Liability Measures, indicate the Present value of contributions & expense Discount Rate, i.e., the interest rate to be used to discount the funding contributions (“employer contributions”), accounting expense (“net periodic cost” or, in the U.S. public mode, “annual pension cost”) and the ultimate cost liability (“ultimate cost”) deterministic and stochastic forecast output variables to the baseline valuation date.
The Benchmark for Liability Returns and Ultimate Cost, if selected, will be used as the liability basis for both Liability Return and Ultimate Cost calculations. Liability Return and Ultimate Cost values are available in both deterministic and stochastic forecast output. The Liability Returns includes the Liability Return, Excess Return, and Compound Annual Excess Return. Liability Return is the return necessary to reach the end-of-year liability where cash flow is normal cost minus the present value of benefit payments for a one-year horizon. The present values of benefits is determined using the Benchmark Liability discount rate. The Excess Return is the Nominal Return geometrically reduced by the Liability Return. See the Liability Return and Excess Return Technical Reference article for details. The Ultimate Cost for any given year is defined as the present value of employer plan year contributions made prior to that year plus the present value of the unfunded liability. All present values in the Ultimate Cost calculation are determined using the discount (interest) rate specified for the Present value of contributions & expense Discount Rate parameter.
The target cost methodology was developed as a way to integrate pension contributions and corporate finance policies without regard to any minimum/maximum contribution limits that may apply to a plan. Target cost analysis involves defining a funding target and a contribution pattern, selecting a period in which to reach the target and, in a Stochastic Forecast, selecting a level of conservatism. The target is expressed as a funded ratio: the market value of assets divided by a liability value. To perform target cost analysis, check the Calculate Target Cost box and click the Parameters button, to access the Target Cost dialog box, in which you specify the applicable parameter values.