QUESTION: Why do the annual pension benefit amounts used to develop my solvency and windup liabilities differ from the benefit amounts used to develop my PVB?

ANSWER: The benefit used to develop solvency & windup liabilities may differ from the projected benefit used to develop PVB (present value of benefits) for the following reasons:

1. Solvency & windup liabilities are a unit credit type of liability and, as such, generally, are valued in ProVal as an accrued benefit, rather than as a projected benefit. The Benefit Formula Component value used in the benefit formula of the Benefit Definition therefore, generally, is calculated using service and salary as of the valuation date for solvency & windup liabilities, whereas these values are projected to decrement date for PVB.

2. For a service-related table type of Benefit Formula Component, service is frozen on the valuation date for solvency  & windup liabilities (unless grow-in rights apply), whereas service is projected for the projected benefits used in PVB.

3. For a lump sum factor type of Benefit Formula Component, if the user has specified that the underlying specialized liability interest rate(s) and/or mortality basis are to be substituted for the lump sum factor valuation interest and mortality (see the “radio button” parameters of the Conversion Factors topic of Valuation Assumptions), then these components will have different values in the benefit used to determine solvency liability versus the benefit used to determine PVB.

4. When an ITA maximum pension is specified, in the projected benefit used for a PVB calculation, the ITA maximum is calculated using the dollar limit and service both projected to decrement. For solvency purposes, the ITA maximum is frozen on the valuation date if the “use valuation date for Solvency  & Windup Liabilities” box is checked, under the Regulatory Data topic of (funding) Valuation Assumptions. If this box is not checked, then the dollar limit is projected to decrement but service is frozen.

5. In addition to the above items that may cause differences between the benefit at decrement, a cost- of-living adjustment may be specified differently for solvency  & windup liabilities (and further between the annuity purchase and the transfer value pieces of solvency liability) and the ongoing PVB (and other ongoing liabilities), resulting in a different post-decrement projection.

For these reasons, in addition to having separate Payment Form Value sample life reports for solvency  & windup liabilities, separate Benefit Definition sample life reports and post-decrement sample life reports are also available.