In the OPEB mode of operation this topic is entitled “Increase Rates & Current Values”. “Crediting Rates” refers to cash balance Accrual Definitions and employee contribution refund, which are not found in OPEB mode. "Current Values" refer to the values assigned to Constant or Table Benefit Formula Components as of the current valuation date. For Long Term Disability assumptions in OPEB mode, only Benefit Formula Components are applicable.
ProVal allows you to set assumptions for items found in the following categories:
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Regulatory Items:
You must define increase rates for all regulatory items referenced directly or indirectly in the Plan Definition, even if the increase rates are zero (ProVal will not read a blank as zero). Furthermore, you must always provide increase rate(s) (even if zero) for the maximum compensation limit of a U.S. public or U.S. qualified pension plan, regardless of whether you are doing a funding or an accounting valuation. For example, an undefined (instead of zero) input value for the increase rate for the maximum compensation limit in a U.S. qualified funding valuation will result in an error message (and aborted run) at execution.
The increase rates entered under this topic apply for determining values only in “future” calendar years, i.e., years after the calendar year of the valuation date (as indicated by the Valuation Date parameter of the Valuation or Core Projection dialog box). For years up to and including the year of the valuation date, ProVal will use its historical regulatory data unless you override that data under the Regulatory Data topic. Note that “historical” refers to any year up to and including the year of the valuation date, even a year for which regulatory data is not yet published (or, if recently published, may not yet be in ProVal). Thus, for some valuation dates, ProVal may be missing historical data for some year(s). You must add the data you wish to assume for those years, either under the Regulatory Data topic or by modifying ProVal’s regulatory data text files (see the discussion, under the Regulatory Data topic, of overriding historical data); such data cannot be entered by means of increase rates.
In the U.S. qualified pension mode, there are special considerations with respect to IRC section 415(b) maximum benefit limits and IRC section 401(a)(17) maximum compensation limits when computing liabilities under the Pension Protection Act of 2006 (PPA). If you wish to project increases in these limits for purposes of determining the target liabilities for the maximum tax deductible contribution limit (see IRC section 404(o)(3)(B)(ii)), then two increase rate specifications may be desired: a 0% increase rate for purposes of determining the target liabilities for the minimum required contribution limit, but an x% (x>0) increase rate for target liabilities for the maximum tax deductible contribution. ProVal allows you to specify only a single increase rate for the maximum benefit limit; the same is true for the maximum compensation limit. If this is material, run a separate Valuation or Core Projection that references a Valuation Assumptions set with positive increase rates for the limits and select this Valuation or Core Projection, under the Overrides parameter when you set up your Valuation Set or forecast, for the PPA maximum tax deductible basis target liabilities for active participants. Thus, if your law selection is “PPA”, you may use a 0% increase rate for PPA target liabilities under minimum funding rules but override with x% for PPA target liabilities for the maximum contribution limit. If your law selection is “Pre-PPA and PPA”, that is, you are coding a forecast that begins before the funding rules of PPA take effect, with transition to PPA over the forecast period, the increase rates you enter as valuation assumptions will be used for all years of the forecast. Again, you may use the Overrides button to “switch”, when PPA takes effect, from 0% for pre-PPA actuarial liabilities to x% for just the PPA liabilities used for the maximum contribution limit.
In the Canadian registered pension mode, to reflect published Income Tax Act (ITA) maximum pension amounts for years after the year of the valuation date, you must enter increase rates under this topic (not overrides under the Regulatory Data topic). See the example of variable increase rates presented in a paragraph below.
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the following types of Benefit Formula Components:
- Constant and Table components that apply increase rates
- Cash balance accrual definitions with an Interest crediting rate specified in Valuation and Projection Assumptions
- In Universal pension mode, career average accrual definitions with indexation specified in Valuation and Projection Assumptions
- Pension equity components where interest applies from decrement to normal retirement age
- Benefit Formula Components where the Current Value is specified in valuation assumptions
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Accrual Basis Components that apply increase rates.
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In OPEB mode only, Lifetime and Annual Limits that apply increase rates.
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In universal mode only, Insurance Contracts that you have defined under the Insurance Reserves section of the Plan Definition.
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Modified Cash Refund Annuities that you have defined as Payment Form Definitions and Inactive Payment Forms that have a deferral period for commencement of benefit payment.
- Employee Contributions for which a refund of employee contributions will be paid when not eligible for any plan benefit.
If you wish for any of the topics above except Insurance Contracts and Modified Cash Refund Annuities, you may select a Plan Filter (or Promise filter for German pension mode) from the dropdown list, to reduce the list of possible choices to those associated with a particular Plan Definition. Please see Filters for details.
Select a category to select the items or components to which you wish to apply increase rates, crediting rates or, for universal mode insurance contracts, excess interest rates, or current values:
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Regulatory items may have associated increase rates, to obtain increased values of regulatory items in years following the year of the valuation date. For example, if a constant 4% increase rate is entered and the valuation date is 1/1/2000, then an unrounded U.S. IRC maximum compensation limit of $172,095 as of 1/1/2000 will be increased to (1.04 x 172,095) $178,979, which is then rounded in accordance with IRS rules to $170,000 at 1/1/2001. The unrounded 1/1/2001 value of $178,979 will be increased 4% to $186,138 and rounded down to $180,000 at 1/1/2002, and so forth.
Any custom regulatory table you have created will also be listed in this category, under the name by which it is known in the Custom Regulatory Tables library.
To apply increase rates, select the desired items, click the Edit button, and complete the parameter for defining the associated rates.
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The Benefit Formula Components and Accrual Basis Components listed are only those Benefit Formula Components and Accrual Basis Components, respectively, that exist in the current Project (or were previously defined for a Valuation or Core Projection referencing either this Valuation Assumption set or a set from which it was copied by “saving as new”). The following Benefit Formula Components will be listed:
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- Constant and Table Benefit Formula Components where the box entitled “Apply increase rates” has been checked
- Cash balance accrual definitions if you have indicated that the interest crediting rate is specified in valuation and projection assumptions
- In Universal pension mode, career average accrual definitions with indexation specified in Valuation and Projection Assumptions
- Pension equity accrual definitions where Interest applies from decrement to normal retirement age
- Constant or Table Benefit Formula Components where Current Values are specified in valuation assumptions
Increase rates for components, and crediting rates for cash balance components, unlike increase rates for regulatory items, are applied retrospectively as well as prospectively. That is, a constant increase rate (or a varying increase rate that is not zero for years prior to the year of the valuation date) will produce a decreasing, not level, component value for years before the calendar year of the valuation date.
Note that increase rates applied to an Accrual Basis Component alter the value of the Accrual Basis for all years (of service, age or points, as applicable). Alternatively, instead of increase rates, you may use the with new rates as of parameter of the Accrual Rates topic of the (accrual definition) Benefit Formula Component, with the new rates applied for all years of benefit service. If the new benefit levels are stated as a dollar amount or a percentage of pay, it may be preferable to use the latter parameter, rather than increase rates, thereby avoiding the need to compute the equivalent rate of increase, to input here, of a new benefit level over the old level (see the example, shown in a following paragraph, of determining the equivalent increase rate). Be mindful, however, of attribution issues under unit credit and projected unit credit cost methods; see our Frequently Asked Questions article entitled “Flat dollar plan with increasing benefit level ” for more information.
If an item requires an increase or crediting rate and none has been entered, then execution of a Valuation or a Core Projection will be aborted. To apply increase rates, select the desired items, click the Edit button, and complete the parameter for defining the associated rates.
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OPEB mode has two topics related to Lifetime & Annual maximums. The items listed under each topic are only those that exist in the current Project (or were previously defined for a Valuation or Core Projection referencing either this Valuation Assumption set or a set from which it was copied by “saving as new” and for which rates applied).
Lifetime Maximums & Annual Limits listed are entries for which the option to increase the limit was selected along with either the option to Apply increase rates to limit or, the limit is increased annually and the option to apply increase rates to the outstanding balance was selected.
Lifetime Maximums & Annual Limits - Annual Credits listed are entries for which the option to increase limit annually was selected and the option to apply increase rates to the annual credits was selected.
Increase rates for lifetime maximums and annual limits, unlike those for regulatory items, are applied retrospectively as well as prospectively. That is, a constant increase rate (or a varying increase rate that is not zero for years prior to the year of the valuation date) will produce a decreasing, not level, lifetime maximum or annual limit value for years before the calendar year of the valuation date.
If an item requires an increase rate and none has been entered, then execution of a Valuation or a Core Projection will be aborted. To apply increase rates, select the desired items, click the Edit button, and complete the parameter for defining the associated rates.
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For (universal mode) insurance contracts, you will be able to specify the excess return crediting rates for the participation (a.k.a. dividends) of the participating insurance contracts. First the opportunity is provided to select a Plan Definition in the Compare with Plan Definition drop down list box. If you select a Plan Definition, the names of its prior contracts will be used in the ensuing spreadsheets instead of the default “Prior a”, “Prior b”, etc., and its interest rates will be shown in the ghosted Contract Interest column of each spreadsheet. This feature is just a convenience to help you parameterize the Valuation Assumptions with reference to a specific Plan Definition; when a valuation is ultimately run, it can reference any Plan Definition.
There are two otherwise identical spreadsheets on the dialog box: one each for the employee and employer insurance contracts. In each case, the excess return crediting rates for participation are entered first for the current contract, and then for each prior contract. By default, the spreadsheets accommodate assumptions for up to three (3) prior contracts, but if the referenced Plan Definition includes more than three, a row will be provided for each defined prior contract.
You are required to enter the Excess Rate 1 and Excess Rate 2, in decimal form (e.g., 0.03), for each participating contract. Typically these rates will be the same, but the excess rate 1 is applied to the end of year reserve and the excess rate 2 is applied to the half of the difference between the end of year and the beginning of year reserve when the participation is based on the average reserve. (When the participation is based on the total reserve, the excess rate 2 is applied to the full difference between the end of year and the beginning of year reserve.)
Currently ProVal uses the valuation assumptions for excess return crediting as the projection assumptions. Thus, there is currently no opportunity to value insurance contract participation experience during a forecast as anything other than expected (i.e., as anything other than anticipated in the valuation).
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For modified cash refund annuities, complete the Crediting Rate on guaranteed amount during deferral period parameter to define the interest rate(s) that will apply during the deferral period to the guaranteed amount specified within the active and/or inactive modified cash refund annuity payment forms. Note that the same interest rate(s) are applied to all modified cash refund annuities defined (within both active and inactive payment forms). (If you wish to apply different interest rates during the deferral period for different modified cash refund payment forms, you must value them in separate Valuations or Core Projections.) No interest is applied to the guaranteed amount after payments commence; thus interest is applied only to modified cash refund annuities that have a deferral period. Interest is credited at the end-of-the-year. You have three choices for defining the associated rates, discussed below.
Note that crediting rates for modified cash refund annuities are not applied prior to the valuation date, a consequence of the fact that if the deferral period begins prior to the valuation date, the annuity is treated as in payment status on the valuation date, and thus there is no deferral period subject to crediting rates.
If a deferred modified cash refund annuity is referenced by the Valuation or Core Projection, then an interest crediting rate is required; if none has been entered, then execution of the run will be aborted.
- The (pension modes except German) Employee Contributions listed are only those that exist in the current Project (or were previously defined for a Valuation or Core Projection referencing either this Valuation Assumption set or a set from which it was copied by “saving as new”) and for which the box entitled “Refund employee contributions when not eligible for any plan benefit” has been checked. For each employee contribution, specify the crediting rate used to determine the accumulated employee contributions to be refunded.
- In German mode, Accounting assumptions include the Contract Renewals topic. For each Benefit Formula Component in which a guaranteed contract period or end date is specified, checking the box will allow the end date to be ignored for purposes of Accounting valuation. If checked, allocations from the standpoint of each valuation date will be assumed to continue without regard to the end date.
The choices for the parameter defining the associated rates are:
- A Constant rate of increase, or interest credit, will be applied for all calendar years starting with the year of plan entry (for regulatory items and modified cash refund annuities, the year following the year of the valuation date), both before and after decrement (for a modified cash refund annuity, after decrement). Enter the constant rate of annual increase, or annual interest crediting rate, as a number between zero and 1 (not as a percentage).
- Variable (from library) accesses increase rate tables that have been entered under the Reference Tables command of the Input menu. Select from the list of all Increase Rate Tables that have been saved and unhidden in the current Project or click the
button to create a new table. (Alternatively, you may specify the varying annual rates directly in this dialog box, by means of the next, or “Variable”, option for this parameter. However, if you will apply these increase / crediting rates in another set of Valuation Assumptions or Projection Assumptions, then you are advised to store them in a table in the Increase Rate Table Library, to avoid having to input the rates again manually.)
Instead of a single table, you can specify "<rates by coded database field>" if different tables should be used for different groups of records, identified by values of a coded database field (e.g., Division). After selecting this choice from the dropdown list, to select the tables for the various field codes, click the Parameters button that becomes accessible (on the right), which provides access to additional parameters to specify how the rates vary according to the contents of a coded database field. Select from the list (of all coded fields unhidden in the current Project) that appears when you click the arrow for the parameter Coded database field. In the spreadsheet displayed, each code of the selected field appears in the Database Code Column. For each code, click its row in the Rate Table column and then click the arrow that appears. Choose the applicable rate table from the list.
Note that there is a “<no rates>” option for Benefit Formula Components, Accrual Basis Components and modified cash refund annuities. Although this option produces the same Valuation results as a Constant increase rate of zero, results in a Core Projection will differ. This is because valuation assumption sensitivities are applied to a zero constant increase rate, whereas a table selection with “<no rates>” specified is treated as if no increase rates are applied to the component or modified cash refund annuity and thus no sensitivities are applied.
- The Variable option allows you to enter, directly in this dialog box (instead of by reference to a table), rates of annual increase, or annual rates of interest credit, that vary by calendar year. Complete a row for each rate. For example, if the valuation date is 1/1/1999 and an increase rate of 5% is assumed for calendar years through 2001 and 6% thereafter, then enter
| From | To | Rate |
| -- | 2001 | 0.05 |
| 2002 | -- | 0.06 |
ProVal fills in the To column automatically, and the last rate 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 rates: if you have several rates in your assumptions, you may need to press the ENTER key, to create a new row, when you get to the bottom of the spreadsheet.
A rate of increase must be entered for a regulatory item or component, not its value for a particular calendar year. If a value for a particular year is stated, rather than a rate of increase, compute the equivalent rate of increase over the preceding year’s value and enter that rate in the row for the preceding year. For example, if the valuation date is 1/1/2000 and you have a benefit formula component with a value of $50, increasing to $60 at 1/1/2001, then the increase is 20% and you should enter
| From | To | Rate |
| -- | 1999 | 0 |
| 2000 | 2000 | 0.2 |
| 2001 | -- | 0 |
Note that if instead you enter
| From | To | Rate |
| -- | 2000 | 0.2 |
| 2001 | -- | 0 |
ProVal will decrease the component value by 20% from 1/1/2000 back to 1/1/1999, another 20% from 1/1/1999 back to 1/1/1998, and so forth.
Note also that if the valuation date is, for example, 10/1, ProVal uses the increase rate in the row for 2000 for the one year period beginning on 10/1/2000, not for the calendar year 2000.
(See Increase Rate Tables for another example of this technique, applied to a schedule of benefit increases in future years under a pension plan.)
Another use for varying increase rates is application of Canadian ITA maximum pension amounts, which are published for some years into the future. As a specific example, ITA maximums through 2009 were known in 2006. To perform a valuation as of 1/1/2006 reflecting these published limits, and, e.g., a 4% per year increase thereafter, you would calculate the rate of increase for each year as follows:
| Year | Limit | Increase over prior year | Calculated as |
| 2006 | 2111.11 | -- | -- |
| 2007 | 2222.22 | 0.05263108 | (2222.22/2111.11) -1 |
| 2008 | 2333.33 | 0.05 | (2333.33/2222.22) -1 |
| 2009 | 2444.44 | 0.04761864 | (2444.44/2333.33) -1 |
and enter variable interest rates as follows:
| From | To | Rate |
| -- | 2005 | 0 |
| 2006 | 2006 | 0.05263108 |
| 2007 | 2007 | 0.05 |
| 2008 | 2008 | 0.04761864 |
| 2009 | 2009 | 0.04 |
- Use underlying liability interest rates is an option only available in Canadian mode and only for Contribution Definitions and cash balance Benefit Formula Components. When selecting this option, the rate used to credit interest will depend on the interest rate underlying the liability measure. The interest crediting rate for the funding ongoing liability will be the ongoing interest rate, the interest crediting rate for solvency transfer value liability will be the transfer value interest rates, etc. For accounting valuations, all liability measures will reflect the accounting discount rate (note that if you have selected an alternate ABO interest rate, the alternate rate will be ignored for purposes of crediting interest and the accounting discount rate will still be used). Even when not using underlying liability interest rates for the ongoing liability, it is still possible to specify that underlying liability interest rates are to be used for solvency and windup liabilities by checking the For Solvency & Windup liabilities use underlying interest rates box.
For each component specified under all categories of the Increase & Crediting Rates topic you can specify whether or not +/- valuation assumption sensitivities are applicable. Check the +/- valuation assumption sensitivities applicable box to apply the valuation assumption sensitivity specified (if any) in the Valuation.