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16 Cards in this Set
- Front
- Back
Immediate Gain Funding Methods
The immediate gain funding methods (which can be used for funding multiemployer plans) are: |
- Unit credit
- Entry age normal
- Individual level premium |
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Each method has its own unique way of determining |
normal cost and an initial unfunded liability. In addition, an experience gain or loss is determined each year that reflects such items as asset gains and losses, mortality gains and losses. |
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The experience gain or loss is simply |
the difference between the expected unfunded accrued liability and the actual unfunded accrued liability. |
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The expected unfunded accrued liability is: |
eUALt = [(UALt-1 + NCt-1) × (1 + i)] - Contributiont-1 - Contribution interestt-1 |
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The gain or loss can also be calculated by |
source.
For example, the asset gain or loss is just the difference between the expected and actual assets. The non-asset gain or loss is the difference between the expected accrued liability and the actual accrued liability. |
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Unit Credit
Under the unit credit method, the normal cost is equal to |
to the present value of the benefit accrual for the year. |
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Unit Credit
The accrued liability is equal to |
the present value of the benefit accrual attributable to past service. |
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Unit Credit
A normal cost and accrued liability is determined for |
each individual in the plan. |
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Unit Credit
The total normal cost and accrued liability is the sum of |
the individual normal costs and accrued liabilities. |
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The unit credit method and the projected unit credit method are |
the same methods.
Projected unit credit merely indicates that there is a salary scale, and benefits will be calculated using projected salary with that salary scale applied. |
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Entry Age Normal
The entry age normal method assumes entry age to be age at
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at hire (even if this is before the plan became effective) unless otherwise indicated in the exam question.
The method is an individual method unless otherwise noted, so individual normal costs and accrued liabilities are determined and added together. |
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Entry Age Normal
The normal cost is determined as either
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1) a level percentage of salary
2) or level dollar amount.
This is determined by amortizing the present value of future benefits at entry age over future service to retirement. |
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Entry Age Normal
The accrued liability is equal to
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the accumulated value of the prior normal costs.
Alternatively, it can be calculated as the difference between the present value of future benefits and the present value of future normal costs. |
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Entry Age Normal
Note that the interest for the amortization factor uses
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combined interest rate and salary scale rate. The normal cost in each case uses an accumulation at the salary scale rate for each elapsed year from entry age to attained age since the normal cost increases by the salary scale each year. |
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Entry Age Normal
Note that the interest for the accumulation factor uses |
the combined interest rate and salary scale rate. It is important that the accumulation factor is multiplied by the normal cost as of the date that the accrued liability is being determined, not the normal cost at entry age. |
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Entry Age Normal
The accrued liability can also be calculated using |
the present value of future benefits less the present value of future normal costs.
Note that the difference in the accrued liability using each method is simply due to rounding. Again, it is important that the annuity due factor is multiplied by the normal cost as of the date that the accrued liability is being determined, not the normal cost at entry age. |