CHAPTER 2

Traditional Unit Credit (TUC)

 The value at the valuation date of the pension benefit accrued from the date of entry
into the plan to the date of valuation.
 Also called the Unit Credit Cost Method and the Accrued Benefit Cost Method
 No use of salary scale assumptions for future salaries (salaries are not expected to
increase)
 The annual pension benefit which has accrued from entry age e to age x is a certain
(flat/constant) amount of dollars per month for each year of service.
 The annual benefit is denoted as 𝐵𝑥
 The piece of the total pension benefit (unit benefit) that accrues for a particular year of
service is denoted as 𝑏𝑥
 The AL at age x is the value of the pension benefit accrued from age e to age x
 The total actuarial liability (TAL) at time 0 is the summation of all active participants
 The liability for each participant increases with age
 The TAL increases with time if no participants leave the group or no new entry of
participants
 The NC at the beginning of each year is the cost of the pension benefit that is earned in
that year
 The NC for younger participants is lower due to greater effect of discounting
 The total normal cost (TNC) for the plan each year is the sum of the NC of all
participants receiving benefit accruals.
 The TNC in future years will be affected by aging, withdrawals, retirements, deaths, and
new entrants.
(𝜏)
𝐷𝑟 (12)
𝐴𝐿𝑥 = 𝐵𝑥 . (𝜏)
. 𝑎̈𝑟 = 𝑁𝐶𝑥 (𝑥 − 𝑒)
𝐷𝑥
(𝜏)
𝐷𝑟 (12)
𝑇𝐴𝐿0 = ∑ 𝐴𝐿𝑥 = ∑ 𝐵𝑥 . (𝜏)
. 𝑎̈𝑟
𝐷𝑥
𝐵𝑟
𝑏𝑥 =
𝑟−𝑒
(𝜏) (12)
𝐷𝑟 (12) 𝑁𝑟 (12)
𝑁𝐶𝑥 = 𝑏𝑥 . (𝜏)
. 𝑎̈𝑟 = 𝑏𝑥 . = 𝑏𝑥 . 𝑣 𝑡 𝑡𝑃𝑥 . 𝑎̈𝑟
𝐷𝑥 𝐷𝑥
Benefits with a Salary Scale

 Independent of age ( Eg: 5% per year = (1.05)e−x )

Larger percentage increases at young age as compared to older ages

S
 Dependent of age ( Eg: Sx )
e
For plans with many participants, use a more sophisticated scale that depends on age

Projected Unit Credit (PUC)

 Addition of the use of salary scale to the TUC cost method

 The current salary is projected to the date of retirement using a salary scale
 The retirement benefit is distributed evenly over the participant’s career, if the unit
benefit is the SAME for each year of service.
 Either use a simple salary scale or an age-dependent scale, but not both
 The projected benefit can be prorated in direct proportion to service
 Back-loaded plan - To preserve the employee’s loyalty
- The longer they stay in the service, the higher the total benefit
 Front-loaded plan - To attract more people entering the service, but let workers leave
early
- Benefit is high during the earliest year of service
 PUC loss from salary experience is smaller than TUC loss because PUC contained a
benefit improvement assumption
 𝑏𝑥 under PUC is larger than 𝑏𝑥 under TUC
 𝑏𝑥 under PUC is a function of 𝑆𝑟−1 while under TUC, 𝑏𝑥 is a flat dollar amount, which
typically increased every three years.

𝐵𝑥 = % 𝑜𝑓 𝑆𝑟−1 (𝑥 − 𝑒)
𝑠𝑟−1
= % 𝑜𝑓 𝑆 (𝑥 − 𝑒)
𝑠𝑥 𝑥
= % 𝑜𝑓 (1 + 𝑠)𝑟−1−𝑥 𝑆𝑥 (𝑥 − 𝑒)

(𝜏)
𝑠𝑟−1 𝐷𝑟 (12)
𝐴𝐿𝑥 = % 𝑜𝑓 𝑆𝑥 (𝑥 − 𝑒) (𝜏) 𝑎̈𝑟
𝑠𝑥 𝐷𝑥
(𝜏)
𝑟−1−𝑥
𝐷𝑟 (12)
= % 𝑜𝑓 (1 + 𝑠) 𝑆𝑥 (𝑥 − 𝑒) (𝜏)
𝑎̈𝑟
𝐷𝑥
(𝜏)
𝑠𝑟−1 𝐷𝑟 (12)
𝑁𝐶𝑥 = % 𝑜𝑓 𝑆𝑥 (𝜏) 𝑎̈𝑟
𝑠𝑥 𝐷𝑥
(𝜏)
𝑟−1−𝑥
𝐷𝑟 (12)
= % 𝑜𝑓 (1 + 𝑠) 𝑆𝑥 (𝜏)
𝑎̈𝑟
𝐷𝑥
Differences between TUC and PUC

TUC PUC

𝐵𝑟 𝑏𝑥 × 12(𝑟 − 𝑒) % 𝑜𝑓 𝑆𝑟−1 (𝑟 − 𝑒)

𝐵𝑟 𝐵𝑟
𝑏𝑥 𝑟−𝑒 𝑟−𝑒

𝐵𝑥 𝑏𝑥 (𝑥 − 𝑒) 𝑏𝑥 (𝑥 − 𝑒)
(12) (12)
𝑁𝐶𝑥 𝑏𝑥 . 𝑣 𝑟−𝑥 𝑟−𝑥𝑃𝑥 . 𝑎̈𝑟 𝑏𝑥 . 𝑣 𝑟−𝑥 𝑟−𝑥𝑃𝑥 . 𝑎̈𝑟
(12) (12)
𝐴𝐿𝑥 𝐵𝑥 . 𝑣 𝑟−𝑥 𝑟−𝑥𝑃𝑥 . 𝑎̈𝑟 𝐵𝑥 . 𝑣 𝑟−𝑥 𝑟−𝑥𝑃𝑥 . 𝑎̈𝑟
The charts assume no death benefit, if there were, NC would be slightly larger