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Old 01-14-2008, 04:49 PM
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Default Unit Credit Method

Pension newbie with a couple questions here:

1) Does the normal cost contribution equal the difference between current year's accrued benefits and last year's accrued benefits?

2) Is this the only funding method applicable post PPA-06' for non multi-employer plans?

Thanks for dealing with my mundane questions ladies and gents!
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Old 01-15-2008, 09:31 AM
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Originally Posted by colby2152 View Post
Pension newbie with a couple questions here:

1) Does the normal cost contribution equal the difference between current year's accrued benefits and last year's accrued benefits?

2) Is this the only funding method applicable post PPA-06' for non multi-employer plans?

Thanks for dealing with my mundane questions ladies and gents!
For item 1, the Unit Credit normal cost equals the present value of the change in the accrued benefit.

For item 2, the minimum contribution is defined in IRC 430 based on the Funding Target and the Target normal cost. Part of the maximum deductible limit also refers to the minimum under IRC 430. The minimum contribution is basically calculated using the Unit Credit cost method.

But that is only for purposes of the maximum and minimum contributions. A company may need to fund more than the minimum to avoid the benefit restrictions under IRC 436. The actuary can use any method to calculate a recommended contribution that is between the maximum and the minimum.

Looking forward to EA-2A yet?
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Old 01-15-2008, 10:21 AM
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For item 1, the Unit Credit normal cost equals the present value of the change in the accrued benefit.
Okay, so when we are talking about change in the accrued benefit, are we talking about the monthly or annual benefit OR the Lump Sum payable at retirement?

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Originally Posted by Rick_G View Post
For item 2, the minimum contribution is defined in IRC 430 based on the Funding Target and the Target normal cost. Part of the maximum deductible limit also refers to the minimum under IRC 430. The minimum contribution is basically calculated using the Unit Credit cost method.

But that is only for purposes of the maximum and minimum contributions. A company may need to fund more than the minimum to avoid the benefit restrictions under IRC 436. The actuary can use any method to calculate a recommended contribution that is between the maximum and the minimum.
Okay, so Unit Credit method will be the only one listed on the Schedule B -- will there even be choices anymore? However, actuaries can use any cost method for their own recommendations as long as the value is between the max and min - the official max and min are calculated through PPA 06' funding rules.

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Looking forward to EA-2A yet?
I am trying to get a jump start on it! I am awfully new to this game, and my studies for the SOA MFE exam will be little since it is a retake, so I might as well get ready for the big one!

Thanks
-Colby
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How to explain actuarial exams to someone else...

Good Einstein quote - "One had to cram all this stuff into one's mind for the examinations, whether one liked it or not. This coercion had such a deterring effect on me that, after I had passed the final examination, I found the consideration of any scientific problems distasteful to me for an entire year."
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Old 01-15-2008, 11:04 AM
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Okay, so when we are talking about change in the accrued benefit, are we talking about the monthly or annual benefit OR the Lump Sum payable at retirement?
The Unit Credit normal cost is based on the change in the annual benefit. The present value calculation should reflect any increase in value due to optional forms, such as lump sums.

Quote:
Originally Posted by colby2152 View Post
Okay, so Unit Credit method will be the only one listed on the Schedule B -- will there even be choices anymore? However, actuaries can use any cost method for their own recommendations as long as the value is between the max and min - the official max and min are calculated through PPA 06' funding rules.
Draft Schedule SB for single employer plans shows no choice re: funding method. Draft Schedule MB for multiemployer plans does show a choice for cost method.

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I am trying to get a jump start on it! I am awfully new to this game, and my studies for the SOA MFE exam will be little since it is a retake, so I might as well get ready for the big one!
You may want to download last fall's EA-2A overheads.
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Old 01-15-2008, 05:06 PM
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The Unit Credit normal cost is based on the change in the annual benefit. The present value calculation should reflect any increase in value due to optional forms, such as lump sums.
Okay, so the present value calculation does reflect the increase in value of the lump sums. Thanks!

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You may want to download last fall's EA-2A overheads.
Wow, a lot of information there... thanks Rick!
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How to explain actuarial exams to someone else...

Good Einstein quote - "One had to cram all this stuff into one's mind for the examinations, whether one liked it or not. This coercion had such a deterring effect on me that, after I had passed the final examination, I found the consideration of any scientific problems distasteful to me for an entire year."
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Old 02-05-2008, 03:26 PM
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I've read Sec 430 and 436 several times, and it seems to make sense. But I ran accross a sentence from FAP that states the Unit Credit method is not a suitable cost method for salary based plans. Is that not what PPA does? Can someone explain the apparent discrepancy?

Thanks.
Mike.
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Old 02-05-2008, 05:38 PM
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I've read Sec 430 and 436 several times, and it seems to make sense. But I ran accross a sentence from FAP that states the Unit Credit method is not a suitable cost method for salary based plans. Is that not what PPA does? Can someone explain the apparent discrepancy?

Thanks.
Mike.
The discrepancy is that congress is often stupid. Just my $0.02

On a slightly more serious note, I think as Rick G. has pointed out PPA is really for determining the required minimum and maximum deductible. You are still allowed to use any reasonable funding method to come up with a recommended contribution amount; its just needs to be in the PPA [min,max] corridor.
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Old 02-05-2008, 06:30 PM
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Originally Posted by gunhog View Post
I've read Sec 430 and 436 several times, and it seems to make sense. But I ran accross a sentence from FAP that states the Unit Credit method is not a suitable cost method for salary based plans. Is that not what PPA does? Can someone explain the apparent discrepancy?

Thanks.
Mike.
Quote:
Originally Posted by yankeetripper View Post
The discrepancy is that congress is often stupid. Just my $0.02

On a slightly more serious note, I think as Rick G. has pointed out PPA is really for determining the required minimum and maximum deductible. You are still allowed to use any reasonable funding method to come up with a recommended contribution amount; its just needs to be in the PPA [min,max] corridor.
The FAP material is presented from an "Actuarial Science" perspective. It does not present the various uses of multiple liabilities calculated on the same population. The current debate might suggest that a traditional Actuarial Science perspective might be appropriate for budgeting purposes (as yankeetripper mentions above) but isn't necesasrily appropriate for calculating liabilities for other purposes, such as accounting expense.

The recent restructuring of the pension funding rules for calculating min contributions is a move towards funding to 100% of the termination liability. It is appropriate to measure termination liability using a Traditional Unit Credit method because it only considers the true accrued benefit at the valuation date and does not incorporate any "promises" to future benefits that would not materialize upon termination.
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