Interest Rates
Interest rates are used to discount future payments back to the valuation date to determine liabilities. Except for (U.K. pension mode) PPF interest rates (discussed in a separate section at the end of this article), the values are entered as numbers between 0 and 0.25 (not as percentages).
These rates are used for all liabilities, except where an alternative interest rate is provided elsewhere in Valuation Assumptions. For example, there are alternative rates for:
PBGC variable rate premium liability in the U.S. qualified pension mode (except Multiemployer law selection)
(Optional) actuarial liabilities under the PPA law selection in the U.S. qualified mode
ABO and ASC 960 liabilities under accounting
Current Liability under the Multiemployer law selection in the U.S. qualified mode
Solvency Liabilities in the Canadian registered pension mode
Note that for accounting, the discount rate is defined here but the expected return on assets for balance sheet expense is specified under the Accounting Methodology topic of the Asset & Funding Policy (not in Valuation Assumptions).
Again, except for (U.K. mode) PPF interest rates, interest rates may be entered as a constant (available from a database field in Universal mode), variable by duration from the valuation date (yield curve), variable by calendar year or segment rates (U.S. qualified mode, under only the PPA law selection). Each of these four structures is discussed in more detail below (as are PPF interest rates). Which structures are available is determined by the ProVal mode of operation, whether the assumption type is accounting or funding and, for U.S. qualified mode funding assumptions and U.K. mode funding assumptions, which law is selected.
Constant interest rates
If the Constant interest rate option is selected,
the Pre-decrement rate is used to discount from the decrement date to the valuation date,
the In-deferment rate (or Post-decrement rate in OPEB and German modes) is used to discount from the commencement date to the decrement date and
the Post-commencement rate (or Post-decrement rate in OPEB and German modes) is used to discount payments back to the commencement date.
In U.S. Public Plan mode Valuation Assumptions when using a constant interest rate, there is a Statutory fixed rate checkbox. Check this box to indicate that the interest rate is set by statute and interest rate sensitivities are not applicable. If interest rate sensitivities are specified in either a Valuation or Core Projection , the sensitivity results will be set to the same as the baseline. If a Valuation or Core Projection based on a statutory fixed rate is included in a Valuation Set or Forecast, the statutory interest rate will be ignored for funding policy purposes. Therefore, a Valuation Set (or Forecast) must include at least one Valuation (or Core Projection) that is not based on a statutory interest rate.
Variable by duration from valuation date interest rates
Selecting interest rates that are Variable by duration from valuation date will make available a grid in which to enter two or more rates, which can be either forward rates or spot rates.
When rates that vary by duration are specified as forward rates, then the rate specified at a particular duration from the valuation date (e.g., duration 1-2, indicating the time interval from 1 to 2 years after the valuation date) is used for all discounting during the specified time period, for all payments made during or after that period. Complete a row in the spreadsheet for each forward rate. For example, if the assumed forward rate for the year beginning on the valuation date is 5%, followed by 5.5% for the next year and 6% for the third year and all years thereafter, then enter:
| From | Up To | Rate |
| 0 | 1 | 0.05 |
| 1 | 2 | 0.055 |
| 2 | -- | 0.06 |
If the valuation date is 1/1/2010, monthly benefit payments made through 1/1/2011 will be discounted to 1/1/2010 at 5% interest. Monthly benefit payments made from 2/1/2011 through 1/1/2012 will be discounted at 5.5% to 1/1/2011 and then at 5% to 1/1/2010. Similarly, monthly benefit payments made on 2/1/2012 and all dates thereafter will be discounted at 6% to 1/1/2012, then at 5.5% to 1/1/2011 and then at 5% to 1/1/2010.
When rates that vary by duration are specified as spot rates, then the rate specified at a particular duration from the valuation date (e.g., duration 1-2, indicating the time interval from 1 to 2 years after the valuation date) is used to discount the payment at that duration for the entire period from the valuation date until payment. Complete a row in the spreadsheet for each spot rate. For example, if the assumed spot rate for the year beginning on the valuation date is 5%, followed by 5.5% for the next year and 6% for the third year and all years thereafter, then enter:
| From | Up To | Rate |
| 0 | 1 | 0.05 |
| 1 | 2 | 0.055 |
| 2 | -- | 0.06 |
If the valuation date is 1/1/2010, the monthly benefit payments made on 2/1/2010, 3/1/2010, etc., through 12/1/2010 will be discounted to 1/1/2010 at 5% interest. Similarly, the monthly benefit payments made on 1/1/2011, 2/1/2011, etc., through 12/1/2011 will be discounted at 5.5%, and the monthly benefit payments made on 1/1/2012 and later dates will be discounted at 6%.
Whether forward or spot rates are entered, note that ProVal fills in the Up to column automatically, and the last rate will be used for the last year entered and all years thereafter. Likewise, the From box in the first row has an entry of “0”. Our example involved only a few rates; if you have several interest rates in your assumptions, you may need to press the ENTER key, to create a new row, when you get to the bottom of the spreadsheet. In particular, if the Input is spot rates and you use the entire spot rate curve (as might be typical if you are trying to match a PPA full yield curve), you will have a different rate for each duration after the valuation date and will need to press the ENTER key, to create new rows.
Forward and spot interest rates may be entered for any duration from one year to 100 years after the valuation date, inclusive.
Variable by calendar year interest rates
Selecting interest rates that are Variable by calendar year will make available a grid in which to enter two or more rates. Complete a row for each interest rate. For example, if the valuation date is 1/1/2010 and the interest rate assumed is 7% for calendar years through 2012 and 7.5% thereafter, then enter
| From | To | Rate |
| -- | 2011 | 0.07 |
| 2012 | -- | 0.075 |
ProVal fills in the To column automatically, and the last rate will be used for the last year entered and all years thereafter. Note that the From box in the first row cannot be completed. Our example involved only two interest rates: if you have several interest rates in your assumptions, you may need to press the ENTER key, to create a new row, when you get to the bottom of the spreadsheet.
PPA interest rates
For the “PPA” law selection of funding assumptions in the U.S. qualified mode, the interest rates may be either Segment rates, based on the corporate bond yield curve and as defined under PPA, or spot rates, i.e., interest rates under the corporate bond yield curve regardless of when the bond matures, aka the Spot rate curve. When the Segment rates option is selected, segment rate sets must be entered in both the Funding (minimum required contribution) and Max Tax (maximum tax deductible contribution) columns; two different sets of rates may be entered. When a Spot rate curve is selected, the same spot rates are used for liabilities calculated for funding and maximum tax deductible contribution purposes. The Look up button allows you to look up published historical segment rates and spot curves, depending on which type you have selected. (For details about looking up and selecting interest rates for calculation of target liability values, see the separate discussion of parameters of the "Look up PPA segment rates" and the "Look up PPA corporate bond yield curve" dialog boxes.) Alternatively, you may type the desired segment rates in the three text fields or paste the desired spot curve values into the grid. Note, however, that ProVal will not prevent you from computing target liabilities – for the minimum required contribution, the maximum tax deductible contribution or some other purpose for which target interest rates need to be used (e.g., computing the AFTAP for the Internal Revenue Code section 436 benefit restriction rules) – at rates not matching those acceptable for the relevant calendar month.
If you select Segment rates, enter the desired rates for the 1st segment (for benefits payable during the five year period beginning on the valuation date, presumed to be the first day of the plan year), the 2nd segment (for benefits payable during the next fifteen years) and the 3rd segment (for benefits payable all years thereafter). Each segment rate is used to discount for the entire period from the payment date to the valuation date. Thus, for any benefit payment, interest rates will not vary from the valuation date to the payment date; instead, different (constant) interest rates will be used to discount benefits payable in different years. For example, a benefit payment on 1/1/2015 will be discounted to a 1/1/2008 valuation date using the second segment rate for all seven years between the payment and valuation dates. Note that a benefit payment made on 1/1/2013, exactly five years after the valuation date, will be discounted at the second segment rate; similarly, a benefit payment made on 1/1/2028, exactly twenty years after the valuation date, will be discounted at the third segment rate.
To use the entire spot rate curve rather than the three segment rates, select Spot rate curve. A grid will become available in which to enter rates that vary by one year intervals of duration from the valuation date. The rate entered for a particular interval will be used to discount – for the entire period from the payment date to the valuation date – the benefits payable over the year beginning at that duration from the valuation date. Thus, as for use of segment rates, interest rates will not vary from the valuation date to the payment date; instead, different (constant) interest rates will be used to discount benefits payable in different years. Note that, although the IRS publishes the spot rates at half-year intervals, these rates can be “looked up” in ProVal only by one year intervals. (See the separate discussion of parameters of the "Look up PPA corporate bond yield curve" dialog box.) Furthermore, because you may enter rates manually at durations 0, 1, 2, etc., whereas ProVal’s lookup provides rates at durations 0.5, 1.5, 2.5 and so forth, ProVal will not validate spot rates or warn you of use of rates that do not seem to match those acceptable for the relevant calendar month.
If you select the Spot rate curve, complete a row for each spot rate. For example, if the assumed spot rate for the year beginning on the valuation date is 5%, followed by 5.5% for the next year, 6% for the third year, etc., then enter:
| From | Up to | Rate |
| -- | 1 | 0.05 |
| 1 | 2 | 0.055 |
| 2 | 3 | 0.06 |
| … |
If the valuation date is 1/1/2008, the monthly benefit payments made on 2/1/2008, 3/1/2008, etc., through 12/1/2008 will be discounted to 1/1/2008 at 5% interest. Similarly, the monthly benefit payments made on 1/1/2009, 2/1/2009, etc., through 12/1/2009 will be discounted at 5.5%. ProVal fills in the “Up to” column automatically, and the last rate will be used for the last year entered and all years thereafter. Note that the From box in the first row cannot be completed. Our example involved only a few spot rates. Typically, if you use the entire spot rate curve, you will have a different rate for each duration after the valuation date and will need to press the ENTER key, to create a new row, when you get to the bottom of the spreadsheet. The duration may range from 1 to 100 years, inclusive.
Constant from database field
In Universal mode, select Constant from database field to specify a database field that contains the constant interest rate to use for each record. Note that assumptions using this option can only be used in a Valuation, they are not available for use in a Valuation Set, Core Projection or any Valuation used for a Gain/Loss Analysis. Also note that assumptions using this option cannot be used to perform +/- sensitivities by varying interest rates.
PPF interest rates
For the “PPF” law selection of funding assumptions in the U.K. mode, specify the following Adjusted yields, to be used in accordance with the definition of each active and inactive benefit:
In-deferment (pre-2009 benefits) – Adjusted interest rate to be used, between the valuation date and the commencement date, to discount the pre-2009 benefits
In-deferment (post-2009 benefits) – Adjusted interest rate to be used, between the valuation date and the commencement date, to discount the post-2009 benefits
Post-commencement (pre-1997 benefits) – Adjusted interest rate to be used, from the commencement date forward, to discount the pre-1997 benefits (benefits without increases)
Post-commencement (post-1997 benefits) – Adjusted interest rate to be used, from the commencement date forward, to discount the post-1997 benefits (benefits with increases)
The value of each interest rate entered must be between - 0.05 and + 0.25, inclusive.
See Pension Protection Fund Liability (Section 179) for details.