Canadian Solvency Liability Interest Rates
If one or more benchmark bond yields have been projected in the Capital Market Simulation referenced in the Stochastic Assumptions, the Solvency Liability Interest Rates topic becomes accessible, giving you the opportunity to specify stochastic interest rate assumptions for variation in transfer value interest rates and annuity purchase interest rates.
ProVal permits significant flexibility in the specification of stochastic interest rates, allowing you to specify whether to vary these assumed valuation interest rates over the forecast period and, if so, the relevant benchmark yield basis for variation.
A check in the Vary based on box indicates an election to vary stochastic interest rates based on a benchmark yield. The available choices of Government yields or Corporate yields depend upon whether only government bond returns, or corporate bond returns as well, have been generated by the referenced Capital Market Simulation.
Under the Transfer value interest rates section of this topic, the transfer value portion of the solvency liability may be set to either (1) the full yield curve plus a constant or (2) a Parallel shift based on the change in the benchmark yield.
When an explicit corporate yield curve or a custom CMS is specified, you may select to set the transfer value interest rates to the Full yield curve. (Otherwise, the Full yield curve option is inaccessible.) ProVal determines forecast interest rates by using the full yield curve generated by the CMS plus a constant. The constant allows you to adjust the curve produced by the CMS up or down by a fixed amount (e.g., 0.01 = 1%), enabling the same yield curve to be used for plans with different indexation.
Consistent with the Economic Assumptions section of ASB Revised Standards of Practice for Pension Commuted Values (Section 3800), the following procedure is followed to calculate forecasted solvency transfer value interest rates from the full yield curve after it has been adjusted by the target rate spread (as long as the valuation assumption is specified as one rate up to duration 10 and a different rate thereafter):
Determine the spot rates from the capital market simulation.
Adjust these spot rates up or down in accordance with the specified target rate spread.
For durations 0 through 9 (first 10 years) from the valuation date, determine the (forward) interest rate as the 7-year rate plus 0.9%.
For durations 10 and up (after 10 years) from the valuation date, determine the (forward) interest rate as the 30-year rate, plus half the difference between that rate and the 7-year rate, plus 0.9%.
If you select Parallel shift based on change in benchmark yield, ProVal will take the valuation assumption yield curve and move it up or down in a parallel fashion based on the difference between the year 0 benchmark yield specified under the Benchmark Yields topic and the corresponding benchmark yield produced by the capital market simulator (CMS) for each trial and forecast year. For this purpose, under the Benchmark Yields topic, specify the applicable 30-year Government Benchmark Yield for Year 0 or Corporate Bond Benchmark Yield for Year 0. Note that the parallel shift option generally is used to move a duration-based variable interest assumption in a parallel fashion but may also be used to move a constant valuation interest assumption up and down by the same amount.
A Target rate = benchmark yield plus a spread,
Whether to Adjust the interest rates from semi-annual compounding to an effective annual rate and
Control over the Maximum change in one year in the interest rates, a Maximum rate, a Minimum rate, and the Rounding rule (amount and direction).
The parameters referred to in the first and third bullets are not unique to solvency liability stochastic interest rates and (thus) are discussed in greater detail under the Funding and Accounting Interest Rates article for Stochastic Assumptions.
The deferred annuity purchase rate is inferred from the immediate rate using the same spread between immediate and deferred annuity purchase interest rates as indicated by the parameter settings of the Solvency Liability Annuity Purchase Liability topic of the Valuation Assumptions.
As for the other interest rate parameters, many of these Canadian mode parameters are optional, and optional entries are noted on the dialog box with an asterisk.