It may be desirable to override some of the stochastically simulated experience for the first year, and possibly the second year, of the simulation, to better reflect known information.

Selecting the First & Second Year Simulation Overrides topic under the Economic Experience heading allows you to override experience values of the following rates in the year beginning on the initial valuation date (or measurement date for the accounting investment return) and, if desired, in the year beginning one year after the initial valuation date:

• Investment return - alternatively, the first year investment return may be overridden by reference to an asset value, as noted below

• Accounting Investment return - accessible if the referenced Capital Market Simulation includes separate accounting returns, as indicated under the Years, Trials & Accounting Results topic

• Performance index return - pertains to the N-Year Performance Index asset valuation method; used as the return of asset mix classes of the equity type; it does not override the return of asset mix classes specified as the fixed income type

• Inflation - used for interpolating liability results, controls experience benefit and salary increases

• Additional Cost-of-Living Adjustment (COLA), or Additional Pension increase in UK mode - applied to inactive participant benefits, in addition to any COLA (pension increase) specified in Projection Assumptions, that would already be reflected in the projected liabilities produced by the referenced Core Projection

Enter in the 1st year column values (as a decimal number, not a percentage) to be used as overrides of the experience values produced by the underlying Capital Market Simulation for the initial (first) year and enter in the 2nd year column override values (if any) for the next (second) year.

Selecting this topic also allows you to override the following benchmarks at the first forecast valuation date (one year after the initial valuation date) and, if desired, at the second forecast valuation date (two years after the initial valuation date):

• 30-year government bond benchmark

• Corporate bond benchmark

• Asset benchmark

The 30-year government and Corporate bond benchmarks are accessible if referenced as the benchmark yield for lump sums or for a liability interest rate, or accounting return rate, based on a parallel shift, which may be used to determine future valuation interest rates (including the various U.S. statutory liability interest rates and Canadian solvency liability interest rates). The Asset benchmark is applicable if any cash balance accrual definitions, career average with indexation accrual definitions or employee contributions with refunds vary with the asset benchmark (rather than with inflation).

Enter in the 1st year column values (as a decimal number, not a percentage) to be used as overrides of the benchmark(s) produced by the underlying Capital Market Simulation for the first forecast valuation date and enter in the 2nd year column override values (if any) for the second forecast valuation date.

For any item above, if you wish to override values for the second year, you must also override first year values.

This topic also allows you to override yield curves if any liabilities are forecasted to a full yield curve, as specified under the Valuation Assumptions heading topics. If forecasting to a full yield curve has been selected for at least one liability, the Yield Curve Overrides button is accessible. Click it to select a liability and the associated Forecast Yield Curve library entry you wish to use as an override for valuation interest rates for that liability. For parameter details, see the separate discussion at the end of this article.

Instead of overriding the 1st year rate of Investment return (and Accounting investment return) generated by the Capital Market Simulation asset mix, you may specify a known value of the assets as of the beginning of the second year (and ProVal will determine the corresponding first year experience investment return). When you check the Use known asset values to override first year return box, (the text fields for the 1st year investment return parameters become inaccessible and) text fields become accessible to enter (both) the market value of the Funding assets and the fair value of the Accounting assets as of the end of the first year. ProVal will calculate the first year funding and accounting investment return rates that result in the specified asset values at the end of the year, and the calculated actuarial and market-related asset values will reflect the override values for funding and accounting assets, respectively. If there are any receivable contributions, include them (or, in US qualified mode, if the applicable law for the forecast is “PPA”, include their discounted value) in the funding asset value you enter. The investment returns will be calculated before any end of year additional contribution, and its corresponding asset target, is determined; if the specified (known) asset value is less than the end of year asset target, then the final end of year asset value may be the asset target instead of the specified asset value (depending on the timing of the end of year additional contribution and whether it is made if the targeted funded ratio cannot be met). Conversely, if the specified (known) asset value exceeds the asset target, then the final end of year asset value will equal the specified asset value. Also note that it is possible for cash flow constraints to prevent generating returns that produce the desired override values for the assets.

If investment return or asset value overrides are specified, then for asset classes that have an income return that varies by trial (rather than an income return that remains constant, at the value entered by the user), ProVal’s calculation of actuarial and market-related value of assets will replace, for all trials, the asset class income return with its average.

For Treatment of the specified override value(s), there are two options:

• Replace initial simulated values with overrides will replace the simulated values generated by the Capital Market Simulation starting with the initial (first) year and/or (for simulated benchmarks) the first forecast valuation date. Any 1st year and 2nd year override values entered replace the simulated data for the first and second years and/or first and second forecast valuation dates. The Capital Market Simulation data generated for the third and later years will not be replaced. If you do not wish to replace a simulated value for a return rate, inflation rate, COLA rate or benchmark, you may leave its text field blank, and the simulated value(s) for that item will not be overridden.

• Shift simulated values and prepend overrides will shift (all) the simulated values generated by the Capital Market Simulation one year into the future if a 2nd year override has not been entered, or two years into the future if an override value has been entered for (both the 1st year and) the 2nd year; the override values serve to fill the newly created vacancies (missing values) for the first year or (if there are second year overrides) for both years. This treatment implicitly assumes that the initial simulated values from the Capital Market Simulation are to be applied immediately after the override period. This treatment would be appropriate, for example, if one had a “2014 Capital Market Simulation” but the underlying Core Projections had an initial valuation year of 2012. Note that ProVal will shift values by the same number of years (one or two) for each item (return, inflation, COLA or benchmark) overridden, and it will shift by two years if an override has been entered in the 2nd year column for at least one item. Therefore, override values must be entered, for one or both years (as applicable), for all relevant items (i.e., all items that will be used in the forecast’s calculations), not just those you wish to override.

The Treatment settings also apply to any overridden yield curves.

Yield Curve Overrides

If desired, for the first one or two (future) forecast valuation dates, you can override use of the yield curve generated by the Capital Market Simulation if the referenced simulation includes full yield curves (an Explicit Corporate Yield Curve type or a Custom simulator initially based on the Explicit Corporate Yield Curve type) and one or more of the relevant liabilities is being forecasted to the full corporate bond yield curve.

Check the Override yield curves for box and select either One year or Two years, to override the yield curve produced by the simulator either at just the first forecast valuation date or at both the first and second forecast valuation dates.

Next, under the Override with yield curve(s) for the specified forecast year(s) from parameter, for each liability whose underlying simulated yield curve you wish to override, select the Forecast Yield Curve library entry whose values are to replace the yield curve values generated by the simulator. (Only library entries unhidden in the current Project are listed.) The list of liability types varies by ProVal mode of operation and an entry can be selected for a liability if that liability is forecasted to a full yield curve, as indicated by the current parameter settings (in the Valuation Assumptions section) of these Stochastic Assumptions. If a liability is not forecasted to a full yield curve (according to these parameters), its choice list is inaccessible. If a liability is forecasted to a full yield curve but no override is desired, choose “<None>”.

However, if the selected Treatment (discussed above) is to shift, rather than replace, simulated values, you must override all relevant yield curves or override none, with one exception. In the U.S. qualified mode, if the applicable law setting is “PPA”, the Valuation Assumptions funding interest rates are segment rates, MAP-21 stabilized rates are reflected (specified under the Legislated Interest Rates topic) and you override the yield curve for the max tax liability, then you need not override the yield curve for PPA funding (because the max tax override yield curve will be used to develop the yield curve for PPA funding – see below for details of the calculation). If you do, nonetheless, override the yield curve for PPA funding, as well as for max tax, the specified funding yield curve override will be used for funding liability calculations.

The Accounting liability is available in all modes; other liability types are available as follows:

U.S. qualified mode – “PPA” law selection only:

• (PPA) Funding liability (optional if MAP-21 stabilized segment rates are reflected for funding and you wish to override funding segment rates)

• Max Tax liability (required if MAP-21 stabilized segment rates are reflected for funding and you wish to override funding segment rates)

• (PPA) PBGC liability

Canadian registered mode:

• Solvency liability

All other modes:

• Funding liability (Tax / Funding liability in German mode)

Note that, in the U.S. qualified mode for a “PPA” law selection, if MAP-21 is reflected for funding and valuation interest rates are determined by forecasting to a full yield curve (whether or not you override the max tax liability yield curve), the unadjusted (not stabilized) 24-month average segment rates are added to history and thus will feed the 25-year average used to develop the stabilized rates, which are then used to determine the funding liability. Therefore, if a Max Tax liability override is specified but no Funding liability override is specified (i.e., the parameter value is “<None>”), the PPA funding valuation interest rates are derived (based on the 25-year average and reflecting the corridor) from the yield curve specified as the Max Tax liability override.