In the OPEB mode of operation, this dialog box is simply entitled “Investment Return, Inflation”. “Lump Sum & Asset Benchmarks” refers to lump sum factor Benefit Formula Components, cash balance accrual definitions, career average with indexation accrual definitions and employee contribution refunds, none of which are found in OPEB mode.

Under this topic, you specify the assumed experience of the plan’s assets, over the period of the deterministic forecast, with respect to asset growth resulting from investment performance. You may specify the experience separately for each forecast year (up to 100 years, the number of years permitted in a Core Projection), starting with the baseline year (year beginning on the baseline valuation date and ending at the first forecast valuation date), which is denoted as Year 1. The experience of the second year (first forecast year), or year beginning on the first forecast valuation date, would be entered on the line for Year 2, and so forth. If the Asset & Funding Policy indicates different valuation and measurement dates, then you may specify separate accounting experience for each forecast year, starting with the year beginning on the Asset & Funding Policy baseline measurement date (and ending at the first forecast measurement date).

The Investment Return parameter at the top of this dialog box is the value of the assumed nominal (total) annual return on the market value of assets, that is, the sum of the real return on the fund’s investments and the inflation component of the return. The real return rate should reflect both the income return (the bond interest coupon rate and stock dividend yield rate) and the capital gains and losses on equity types of assets. Depending on the asset valuation method, the investment return may later be smoothed for valuation purposes. (See also Asset Smoothing Parameters.) Enter the investment return rate as a number, e.g., 0.09, not as a percentage. You may enter a rate as low as -1, that is, the entire fund is “wiped out”.

If you have specified separate funding and accounting investment returns (under the other Investment Return parameter), you will see separate columns for Funding Investment Return and Accounting Investment Return. The Funding Investment Return is the value of the nominal annual return on the market value of assets to be used for the funding forecast. The Accounting Investment Return is the value of the nominal annual return on the fair value of assets to be used for the accounting forecast.

Inflation is the assumed annual rate of inflation included in the Investment Return parameter value (or Funding Investment Return and Accounting Investment Return parameter values). Enter the rate as a number, e.g., 0.04, not as a percentage. ProVal will remove geometrically the value of this parameter from the value of the Investment Return parameter(s) to determine the real return(s) on the fund’s investments. The Inflation parameter value may range between -1, indicating severe deflation, and 1, indicating hyperinflation.

The Inflation specification also serves as an independent variable for interpolation purposes. That is, during a forecast, to determine plan liabilities that reflect values of variables affected by inflation (such as increases in salaries and plan benefits), ProVal interpolates among the low, medium and high inflation environments, as specified by the Inflation Environment parameters of the Increase & Crediting Rates topic (in OPEB mode, Increase Rates topic) of Projection Assumptions, to develop the single scenario representing an actual inflation rate as specified here. For example, if the Inflation Environment parameters of Projection Assumptions are 2% for the low inflation environment and 5% for the medium inflation environment and 4% actual inflation is specified here, then ProVal will derive values of inflation-dependent variables in a 4% inflation environment by interpolating between the 2% (low) and 5% (medium) inflation environment values. Refer to the Technical Reference article Interpolation of a Core Projection's results for details.

Note: The inflation experience assumption will be ignored if the Core Projection has been run with only one inflation environment (medium inflation), because then there will not be at least two points (as required by definition of “interpolation”).

Lump Sum Benchmark Yield is the assumed (nominal or total) annual interest rate, or benchmark (total) yield, to be used in the computation of lump sum factor Benefit Formula Component values for actual benefit payments paid from plan funds during the forecast period. The benchmark yield specified for Year 1, the baseline year of the forecast (or year beginning on the baseline valuation date), will be used for lump sum values in the Benefit formula for benefits paid out the following year, Year 2, the year beginning on the first forecast valuation date. Similarly, the benchmark yield specified for Year 2 will be used for lump sum values for benefits paid out the second forecast year, or year beginning on the second forecast valuation date, and so forth. See also the discussion of lump sum benchmark yields under the Lump Sum Factor Interest & Mortality topic of Projection Assumptions. Enter the yield as a number, e.g., 0.05, not as a percentage.

Asset Benchmark determines the experience crediting/indexation rate to be used during the forecast period in the computation of cash balance accrual definitions, career average with indexation accrual definitions and accumulated employee contributions where asset benchmark (rather than inflation) has been selected as the appropriate anchor in the Projection assumptions, under the Increase & Crediting Rates topic. Enter the benchmark as a number, e.g., 0.05, not as a percentage.

In order to determine lump sum values for benefits paid out during Year 1, ProVal needs the assumed annual interest rate or Lump Sum Benchmark Yield for Year 0, the year ending on the baseline valuation date. If your benchmark yield represents the yield on 30-year U.S. Treasury bonds, then you may “look up” the appropriate rate by clicking the Look up button to access the “Look up 30-year Treasury rates” dialog box, which contains a list of historical current month rates for 30-year Treasury bonds (GATT rates). Click the appropriate row in the “Look up 30-year Treasury rates” dialog box and click Paste to paste this rate into the Investment Return, Inflation & Lump Sum Benchmark Yield dialog box as the lump sum benchmark yield experienced in year 0. For example, if your baseline valuation date is 1/1/2003, then year 0 is calendar year 2002. If your plan provides for a one-year “stability period” and a “lookback month” of August, then, for lump sum values for benefits paid out in 2003, the appropriate interest rate is that shown in the list for August 2002. For a definition of the terms used and for guidance, refer to the U.S. Internal Revenue Code Section 417(e) regulations and related pronouncements.

The next Investment Return parameter is relevant only if the Asset & Funding Policy measurement date is not the same as the valuation date. The selected option indicates the relationship of accounting returns for the year beginning on each forecast measurement date to funding returns for the year beginning on the corresponding forecast valuation date. There are three options:

• Same returns for funding and accounting applies if the measurement date is the same as the valuation date and therefore the same returns will be used for funding and accounting. Select this option also if these dates are not the same but you do not choose to refine your forecast to reflect the fact that the year of experience between one forecast measurement date and the next does not cover the same calendar months as included in the year of experience between one forecast valuation date and the next.
• Weighted average accounting return produces an accounting investment return equal to the weighted average of the current and next year’s funding investment return, based on the number of months between the measurement and valuation dates.
• Separate funding and accounting returns provides separate columns, at the top of this dialog box, for entering separate values of investment return for funding and accounting, i.e., experienced over forecast years beginning on each valuation date (used to generate funding results) and forecast years beginning on each measurement date (used to generate accounting results).

Check the Use known asset values to override first year return box to have ProVal calculate funding and accounting investment returns for the baseline year of the forecast (Year 1) that result in the known asset values at the end of Year 1. Specify (both) the market value of the Funding assets as of the end of the first plan year and the fair value of the Accounting assets as of the end of the first measurement year:  

• Funding asset value:  Include any receivable contributions in the value you enter.  In the US qualified mode, if the applicable law for the forecast is “PPA”, include their discounted value.

• Accounting asset value:  In the US qualified mode, under a PPA law selection, if assumed contribution timing is to pay four quarterly contributions (if any) and a final contribution when due, the first year investment return is determined before any quarterly contributions for the second plan year (Year 2).  Therefore, if the measurement date is after the valuation date, subtract Year 2 quarterly contributions paid between those dates, and their associated interest, from the value you enter.

Please note that, if necessary to reach the asset target of a specified end of year additional contribution, the final end of year asset value might exceed the specified known asset value, which consequently might not be honored.  Also, it is possible for cash flow constraints to prevent generating returns that produce the desired override values for the assets.