Pension Funding Methods: Entry Age Normal and Unit Credit

Unit Credit Methods

Under the traditional unit credit (TUC) method, the benefit attributed to each year of service is based on current salary. The actuarial liability at age x is the present value of the accrued benefit: AL = B_accrued * v^(r-x) * (r-x)_p_x^(tau) * a-ddot_r, where B_accrued uses current salary. The normal cost funds one additional year of benefit accrual. The projected unit credit (PUC) method uses projected final salary, producing a larger AL and smoother normal cost over the career.

Entry Age Normal Method

The entry age normal (EAN) method determines a level normal cost (as a percentage of salary or a flat dollar amount) that, if contributed from entry age e to retirement age r, would exactly fund the projected benefit. The normal cost rate P satisfies P * a-ddot_{e:r-e} = PVFB_e (present value of future benefits at entry). The actuarial liability at age x equals the accumulated value of past normal costs, or equivalently, the PV of future benefits minus PV of future normal costs. EAN produces the most stable normal cost over time. Exam LTAM compares these methods.