puc vs entry age

[richharris]

What's the difference, in layman's terms if possible, between the projected unit credit method and the entry age normal method?

thanks

[frisbbzepp]

You might have better luck posting this in the pension section of the forum.

[Duffer]

Originally Posted by richharris

What's the difference, in layman's terms if possible, between the projected unit credit method and the entry age normal method?

thanks

Both methods create a distinction between past service liability, and current normal cost, as a part of the total projected liability.
Entry Age Normal spreads those cost components on the basis of the present value of annuity payments that would be appropriate if you were paying off a fully amortized loan from entry age to retirement age.
Projected Unit Credit spreads those cost components by counting the years over which the benefit is paid.
Consider two methods as follows:
A person has a projected total value of benefits worth 100,000 today.
PUC -
With 20 years of total service, the PUC method splits the 100,000 over 20 years, at 5% of the total value (1/20) to give each year a cost of $5,000.
EAN -
A level annuity payment over 20 years would require an annuity present value of about 12.158 at 6% interest. The Entry Age method would assign the first year payment as 100,000 / 12.158, giving an initial payment of $8,225.

Stated another way, the EAN method is a level cost over all years, while the PUC method changes the cost as the person gets older.

Hope these are helpful.

[its_me]

For an Entry Age Normal Cost Method, using level percentage of pay),is the following true?

At valuation date, Actuarial Liability should be zero( ALWAYS??) because the purpose of funding is to allocate the benefit costs to the years of employment.

Or is the above true for Attained Age Normal Cost method( Level dollar)??

I am not understanding NC and AL for the 2 methods.

The AL calculated ( on pg 657 of older edition) says ..
The AL under EAN cost method using level % approach is derived in the same manner as that under level dollar cost method.

1. I am not sure how they are calculating PV(FNC) here and what is the 0.0222
2. How does the AL =36079 tie with the AL for Entry Age Level Dollar cost method?? they are getting 43,373 on page 653 ( formual 23-11)
3. The NC for the cost allocation methods DO NOT seem to tie up with the spreadsheet created for this

[Rick_G]

I don't have the McGill book any more, so I can't review the calculation details. If you want more background on cost methods, feel free to download last year's EA-2A seminar overheads from my web site. You can also see some discussion of cost methods.

[Chilango]

Projected Unit Credit (PUC) Cost Method

• Increasing cost individual method
• Benefits include salary increases
• Normal cost based on value of accruals for one year using projected pay
• Normal cost typically increases as participants get closer to retirement age
• Immediate gain method
• Gains and losses go into the UAAL

Entry Age Normal (EAN) Cost Method

• Level cost individual method
• Benefits include salary increases
• Normal cost as level percent of salary over the working lifetime
• Level dollar if benefits not pay related
• Immediate gain method
• Gains and losses go into the UAAL

[Chilango]

The attached file has PUC and EAN formulas and exercises.

[JMO]

As a life insurance actuary, I think of unit credit as being like annual renewable term (ART) - the premiums go up every year. Entry age normal (EAN) is more like whole life, where the premiums are levelized, higher than ART in the early years and lower thereafter. The projected benefit with salary increases makes the relationship more complicated, but if the actual increase matches expected, the EAN should be a level percent of salary.

If the premiums are level, the insurance company would hold a higher reserve. Similarly, the accrued liability for EAN will, in general, be higher than for unit credit.

HTH