Future Valuation Interest Rates

For Deterministic Forecast interest rate assumptions at the initial, or baseline, valuation date (i.e., the Valuation Date entered under the Initial Asset Values topic of the Asset & Funding Policy), ProVal uses the specifications contained in the Valuation Assumptions for the various liability interest rates and the specification for the Expected Return on Assets parameter of the Accounting Methodology topic of the Asset & Funding Policy. For all the valuation dates that follow in your forecast, the Future Valuation Interest Rates topic contains the parameters that specify the various liability interest rate assumptions and the assumed expected return on assets.

You may specify the interest rate assumptions separately for each forecast valuation date (note that the forecast can process no more than 100 years, the number of years permitted in a Core Projection), starting with the first forecast valuation date (one year after the baseline valuation date), which is denoted as Year 1. The assumptions for the second forecast valuation date (two years after the baseline valuation date) would be entered in the row for Year 2, and so forth. If you have many years of rates, with identical rates for several years, or rows, then you may save time inputting rates by clicking (Ctrl+D) to duplicate your row downward. For example, if you have three sets of assumed interest rates, one set for the first 10 years, another set for the next 15 years and the third set for all years thereafter, you may type in values for the first row and click (Ctrl+D), then type in values for the eleventh row and click (Ctrl+D) and then type in values for the twenty-sixth row (which values will be used for all years thereafter).

Enter all values as numbers between 0 and 1 (not as percentages).

Select an option for determining future valuation interest rates from the choices available under the Enter a yield curve assumption or specify values below parameter. For each relevant liability type, you may choose one of the following approaches to define the future valuation interest rate assumption:

<rate changes specified below> allows you to input a “delta” or amount to shift (from the value of the interest rate at the baseline valuation date) a yield curve (spot rates) in a parallel fashion, to adjust all forward rates (that vary by duration from the valuation date) from those assumed at the baseline valuation date, or to change a valuation interest rate assumption with a constant structure. For example, if +0.01 is entered for Year 1, the liabilities for the first forecast valuation date will be interpolated as if the entire valuation assumption yield curve (or forward rates or a constant rate) were shifted upward by adding 0.01 to the value of each rate entered under the Interest Rates topic of the Valuation Assumptions command. Similarly, if -0.02 is entered for Year 2, the liabilities for the second forecast valuation date will be interpolated as if the entire valuation assumption yield curve (or forward rates or a constant rate) were shifted downward by subtracting 0.02 from the value of each rate entered in the Valuation Assumptions. Note that this change is always relative to the initial (baseline) valuation date assumptions so that, for example, specifying -0.02 for a year (e.g., Year 2) means that the new yield curve or rate(s) are derived by subtracting 0.02 from the yield curve or rate(s) specified in the Valuation Assumptions. The “rate changes” method is not supported if the Variable by calendar year option is selected (under the Valuation Assumptions command) for the valuation interest rate. If the Valuation Assumptions contain constant structure interest rates that vary pre-decrement, in-deferment and post-commencement and you wish to shift each of these rates by the same “delta” at future valuation dates, select this option.
<rates specified below> allows you to input a constant for the interest rate value(s), rather than an amount of shift from the value of the interest rate(s) at the baseline valuation date. As noted above, you may do this separately for each forecast valuation date. Note that this, constant, option is available even for valuation interest rates whose structure is to vary, such as by duration from the valuation date (e.g., divers PPA rates in U.S. qualified mode, transfer value solvency liability interest rates in Canadian registered mode) or among pre-decrement, in-deferment and post-commencement periods (e.g., if Canadian mode funding interest rates vary in this manner), although selecting this option is not expected to be typical for such interest rates.
<use valuation assumptions for all years> instructs ProVal to use, for each forecast valuation date, the interest rates specified in the Valuation Assumptions and, except in U.S. public mode, the interest rate specified for the Expected Return on Assets parameter of the Asset & Funding Policy.
A Forecast Yield Curve Library entry; select from the list of entries unhidden in the current Project; or click the button to create a new Yield Curve. If one or more Yield Curves have been defined, this option is available for:

U.S. qualified mode PPA liabilities (pursuant to the Pension Protection Act of 2006),
Canadian transfer value solvency liabilities,
the funding liability in all modes except the U.S. qualified and Canadian registered pension modes and
the accounting liability.

Choosing a yield curve represents a “variable by duration from valuation date” valuation interest rate assumption. Note that if a Yield Curve is selected, all interest sensitivity fractions entered under the Valuation Assumption Sensitivities topic of the Projection Assumptions (except those for lump sum factors and optional payment form conversion factors) must be zero.

If, for a particular liability, you select a forecast yield curve from the library or choose “<use valuation assumptions for all years>”, the column in the spreadsheet for that liability will become inaccessible (as no further user specification is needed). For accessible interest rate columns, enter the interest rate assumptions separately for each forecast valuation date (Year); the values entered in the last row will be used for all years thereafter.

If constant interest rates that vary among pre-decrement, in-deferment and post-commencement periods are entered in the Valuation Assumptions, the forecast interpolates results by moving the entire set of interest rates (pre-decrement, in-deferment and post-commencement) up or down in a parallel fashion according to how the future valuation interest rate entered in the Deterministic Assumptions compares to the pre-decrement rate entered in Valuation Assumptions. If a single interest rate is required in a Valuation Set or forecast, for example, the accounting discount rate in a FASB expense calculation or the funding interest rate in a Canadian minimum contribution calculation (such as to amortize bases), the pre-decrement rate is used. Viewing the effective rate in the Valuation Set or Deterministic Forecast output likewise will display the pre-decrement rate.

In all ProVal modes of operation, you may indicate the methodology for determining future valuation interest rates for these liability selections:

Funding liability (in German mode, Tax / Funding liability)
Accounting liability

In the Canadian registered mode, the option selected for Funding liability applies to the ongoing (plan) liability and you may also indicate the future valuation interest rate methodology for:

Solvency Liabilities: Transfer Value
Solvency Liabilities: Annuity Purchase

In the U.S. qualified mode, you may also indicate the future valuation interest rate methodology for these liabilities:

Max Tax liability, i.e., maximum tax deductible contribution liability (“PPA” law selection); for this law selection, Funding liability pertains to the minimum required contribution liability.
PPA Target liability (“Pre-PPA and PPA” law selection, on the PPA Liabilities tab) for plan years subject to the PPA funding rules (as indicated by the transition year entered in the Asset & Funding Policy); for this law selection, Funding liability (on the Funding & Accounting tab) pertains to plan years not yet subject to PPA funding rules.
PBGC liability (all law selections except “Multiemployer”); for the “Pre-PPA and PPA” law selection, this liability is found on the Funding & Accounting tab and pertains to the PBGC variable rate premium liability for plan years not yet subject to PPA (as indicated by the transition year entered in the Asset & Funding Policy). Of course, for the “PPA” law selection, this liability pertains to the PBGC liability calculated according to PPA and for the “Pre-PPA” law selection it pertains to the PBGC liability calculated according to the law in effect prior to PPA.
PPA PBGC liability (“Pre-PPA and PPA” law selection, PPA Liabilities tab) for plan years subject to PPA (as indicated by the transition year entered in the Asset & Funding Policy).
Actuarial liability (“PPA” law selection), i.e., present value of future benefits and any liabilities selected for calculation under the Actuarial Liability topic of Valuation Assumptions.
RPA current liability (all law selections except “PPA”); for the “Pre-PPA and PPA” law selection, this liability is found on the Funding & Accounting tab and pertains to plan years not yet subject to PPA funding rules.
Gateway liability, i.e., gateway current liability (“Pre-PPA” and “Pre-PPA and PPA” law selections); for the “Pre-PPA and PPA” law selection, this liability is found on the Funding & Accounting tab and pertains to plan years not yet subject to PPA funding rules.
Maximum contribution liability, i.e., maximum contribution basis current liability (“Pre-PPA” and “Pre-PPA and PPA” law selections); for the “Pre-PPA and PPA” law selection, this liability is found on the Funding & Accounting tab and pertains to plan years not yet subject to PPA funding rules.

In the U.S. qualified mode, under a "PPA" law selection, the Calculate segment rates button opens a dialog box to enter parameters allowing ProVal to calculate automatically future interest rates for PPA liabilities, based on the monthly rates stored in ProVal. The last known rates are updated monthly in ProVal, shortly after they are published by the IRS. Check the boxes under Calculate segment rates starting..., indicating whether to calculate valuation interest rates, for future forecast valuation dates, for Max Tax liability, Funding liability (reflecting HATFA and BBA 2015) and/or PBGC liability. The following parameters must be entered to tell ProVal what the segment rate calculations should be Based on:

Initial valuation date, consistent with the (baseline) valuation date of the Core Projection(s) you plan to use in the forecasts. ProVal will calculate rates starting with the first forecast valuation date, which is one year after the initial valuation date.
Lookback period for the plan, for max tax and funding interest rates. ProVal defaults this parameter value to 4 months, but you can choose any lookback period from 0 months to 4 months.
Last known rate to reflect in the calculation. ProVal's default value is the most recent monthly rate stored in ProVal, but an alternate date can be selected.
Whether future Monthly rates are "level" or "adjusted" from the date of the last known rate. If "level" is selected, all future (unadjusted) spot segment rates will be set equal to the last known rates. If "adjusted" is selected, enter the Annual changes relative to initial valuation date in the spreadsheet (i.e., for example, specifying +0.01 for a year means that the new rate is the baseline valuation assumption rate plus 0.01, not the previous forecast year's assumed rate plus 0.01). Note that the first forecast year adjustment will be prorated if rates for a portion of the year are known. For details, see the Technical Reference article about adjusted monthly segment rates .

ProVal's calculated interest rates will be saved as Forecast Yield Curve library entries with the input parameters documented in the library entry's Notes. ProVal will only create a new Forecast Yield Curve library entry if the new calculated rates differ from all existing Forecast Yield Curve library entries.

If ProVal did not Calculate segment rates, instead of selecting a future valuation interest rate methodology for the Funding liability parameter, you may Calculate Funding rates based on Max Tax rates (reflecting MAP-21). ProVal will compute the 25-year average required to determine PPA funding interest rates. Click the Historical Rates button and then click the View Historical Rates button to see the annual averages available within ProVal for use in a 25 year average. For each calendar year listed, the rates displayed are the average of the 24-month average segment rates published for the 12 months in the one year period ending on September 30th of that year. (Note that the IRS has not published annual averages since Notice 2013-11, which contained annual averages only through September 30, 2012, but WinTech verifies its calculations for years ending September 30, 2013 and later against other IRS published values.) ProVal will use historical rates for all years ending on September 30th prior to the (baseline) Valuation Date in the 25 year average. The corresponding (annual average) rates for the year ending each September 30th following the Valuation Date cannot be known as of the Valuation Date and thus will be determined by your selection for the Max Tax liability parameter. (For example, if you specified a Forecast Yield Curve and the Valuation Date is 1/1/2018, the segment rates defined for Forecast Year 1 will be used for the most recent of the 25 years in the average computed for the first forecast valuation date, 1/1/2019.) For each future valuation date after the Valuation Date, the annual average rate (for use in the 25 year average) is set equal to the Max Tax interest rate forecasted for that valuation date. Note for Valuation Dates from October 1st through December 31st: rates for the most recent of the 25 years used in the average computed for the first forecast valuation date are known as of the Valuation Date (because they are as of September 30th in that year) and thus are not determined by the user-defined Max Tax rates.

If the Max Tax yield structure, specified under the Interest Rates topic of Valuation Assumptions, is PPA segment rates, yields for funding liabilities will be calculated based on those Max Tax rates and the 25-year average of 24-month average historical corporate bond rates, as described in the preceding paragraph.

If the Max Tax yield structure is spot rates (i.e., a yield curve was specified for Max Tax and Funding), the funding rates will be set equal to the Max Tax rates.

When segment rates are used and MAP-21 stabilization is applied, you may enter Overrides to ProVal’s historical annual averages of 24-month segment rates in the spreadsheet found under the Historical Rates button (if Historical Rates are entered for years ending September 30th after the Valuation Date, they will be ignored).

The various valuation interest rate assumptions for which future valuation date values may be specified correspond to the liabilities listed above. You may also specify, for future valuation dates, the assumed expected return on assets for accounting. Thus the available interest rate parameters are:

Funding Rates (or Change in Funding Rates): For a U.S. qualified mode funding valuation under a “PPA” law selection, these are the rates used (or change in the rates used) to calculate PPA funding liabilities – that is, for calculating PPA target liabilities for minimum required contribution purposes. See the Interest Rates topic of Valuation Assumptions for more information about these rates.
Funding Interest Rate (or Change in Funding Rates): For funding valuations in modes other than U.S. qualified and for a U.S. qualified mode funding valuation under a law selection other than “PPA”, this is the interest rate used (or change in the rates used) for liability results under the selected actuarial cost method. Under the U.S. qualified mode “Pre-PPA and PPA” law selection, this rate is found on the Funding & Accounting tab and pertains to plan years not yet subject to PPA funding rules. See the Interest Rates topic of the Valuation Assumptions command for more information about this rate.
Tax / Funding Interest Rate (or Change in Tax / Funding Rates): For a German mode tax / funding valuation, this is the interest rate used (or change in the rates used) to value the tax/ funding liability.
Max Tax Rates (or Change in Max Tax Rates): For a U.S. qualified mode funding valuation under a “PPA” law selection, these are the rates used (or the change in the rates used) to calculate PPA “max tax” liabilities – that is, for calculating PPA target liabilities for maximum tax deduction contribution purposes. See the Interest Rates topic of the Valuation Assumptions command for more information about these rates.
Target Rates (or Change in Target Rates): For a U.S. qualified mode funding valuation under a “Pre-PPA and PPA” law selection, these are the rates used (or the change in the rates used) to calculate PPA target liabilities for all purposes, including minimum required contribution and maximum tax deduction contribution calculations. This rate is found on the PPA Liabilities tab and pertains to plan years subject to PPA funding rules. See the Target Liabilities topic of Valuation Assumptions for more information about these rates.
PBGC Interest Rate or PBGC Rates (or Change in PBGC Rates): For a U.S. qualified mode funding valuation, under a law selection other than “Multiemployer”, these are the rates used (or the change in the rates used) to determine the PBGC variable rate premium liability. Whether the liability is computed pursuant to PPA (PBGC Rates) or under rules that applied prior to PPA (PBGC Interest Rate) depends on the law selection and, if the law selection is “Pre-PPA and PPA”, whether PPA has gone into effect for the plan (as indicated by the transition year in the Asset & Funding Policy) on or before the forecast valuation date. See the PBGC Variable Premium Liability topic of Valuation Assumptions for more information about these rates. Note that, under the “PPA” law selection, if the PBGC liability is defined in Valuation Assumptions as being based on the same rates as the max tax liability, then the Deterministic Forecast will interpolate PBGC liability using the change in the PPA max tax liability rates (discussed above), not using the PBGC liability rate (or rate change) entered for future forecast valuation dates.
Actuarial Liability Rate (or Change in Actuarial Liability Rates): Under a U.S. qualified mode “PPA” law selection, this is the interest rate used (or the change in the rates used) to calculate actuarial liabilities. Note that if an actuarial liability is calculated based on the PPA funding (i.e., for minimum required contribution purposes) liability yield curve assumptions, rather than a separate interest rate assumption entered under the Actuarial Liability topic of the Valuation Assumptions command, then the Deterministic Forecast will interpolate actuarial liabilities using the change in the PPA funding liability rates (discussed above), not using the actuarial liability rate (or rate change) entered for future forecast valuation dates.
RPA Current Liability Rate (or Change in RPA Rates): For a U.S. qualified mode funding valuation, under a “Multiemployer”, “Pre-PPA” or “Pre-PPA and PPA” law selection, this is the interest rate used (or change in the interest rate used) to calculate current liability under RPA ’94. See the Current Liability topic of the Valuation Assumptions command for more information about this rate.
Gateway Current Liability Rate (or Change in Gateway Rates): For a U.S. qualified mode funding valuation, under a “Pre-PPA” or “Pre-PPA and PPA” law selection, this is the interest rate used (or change in the interest rate used) to calculate current liability under RPA ’94 for the gateway test for exemption from the additional funding charge. See the Current Liability topic of the Valuation Assumptions command for more information about this rate.
Maximum Contribution Current Liability Rate (or Change in Maximum Contribution Rates): For a U.S. qualified mode funding valuation, under a “Pre-PPA” or “Pre-PPA and PPA” law selection, this is the interest rate used (or change in the interest rate used) to calculate current liability for the maximum tax deductible contribution under the Pension Funding Equity Act (PFEA) for plan years beginning in 2004 or 2005 or the current liability interest rate under OBRA ’87, as specified by the Current Liability topic of the Valuation Assumptions set.
Solvency Transfer Value Rate (or Change in Transfer Value Rates): For a Canadian registered mode funding valuation, this is the interest rate, or rates, used (or change in the interest rate, or rates, used) to value a portion of the plan’s solvency liability on the transfer value (aka commuted value) basis. See the Solvency Liability Transfer Value Liability topic of the Valuation Assumptions command for more information about this rate.
Solvency Annuity Purchase Rate (or Change in Annuity Purchase Rates): For a Canadian registered mode funding valuation, this is the annual interest rate, or rates, used (or change in the annual interest rate, or rates, used) to value a portion of the plan’s solvency liability on the immediate annuity purchase basis. See the Solvency Liability - Annuity Purchase Liability topic of the Valuation Assumptions command for more information about this rate. Because a separate interest rate is not specified for the portion of solvency liability (if any) to be valued on the deferred annuity purchase basis, ProVal will determine any deferred annuity purchase solvency liability by interpolating low, baseline and high interest rate scenario liability values in the same manner as for the immediate annuity purchase solvency liability. For example, suppose the immediate annuity purchase rate is specified in Valuation Assumptions as 0.04 and the deferred annuity purchase rate is specified as 0.09. Suppose also that the Projection Assumptions referenced by the Core Projection indicate an interest rate sensitivity change of +0.02 in the high interest rate scenario and -0.02 in the low interest rate scenario. The low interest rate valuations will assume 0.02 as the immediate annuity purchase rate and 0.07 as the deferred annuity purchase rate. The high interest rate valuations will assume 0.06 as the immediate annuity purchase rate and 0.11 as the deferred annuity purchase rate. The baseline valuations will use 0.04 and 0.09, respectively (the rates assumed at the baseline valuation date). If the immediate annuity purchase interest rate entered in these Deterministic Assumptions is 0.05 for some future (forecast) valuation date, this is half way between the baseline and high interest rate assumptions, so the entire annuity purchase solvency liability at that forecast valuation date will be calculated as (roughly) half way between the liability value results of the baseline and high interest rate runs. The implied interest rate for the deferred annuity purchase rate in this case is therefore 0.10.
Accounting Discount Rate (or Change in Accounting Rates): This is the discount rate used (or change in the discount rate used) in an accounting valuation. (The rate for the baseline valuation date is entered under the Interest Rates topic of the Valuation Assumptions command.) This parameter is used for expense calculations under the accounting standard selected under the Accounting Methodology topic of the Asset & Funding Policy and for GASB 67/68 expense calculations in the U.S. public mode. In the U.S. qualified and universal pension modes, the ASC 960 rate will be set equal to the accounting discount rate unless an alternative ASC 960 valuation interest rate is specified, in which case the ASC 960 liability will not vary over the forecast period. To reflect variation in an alternative ASC 960 interest rate, you may run a separate forecast (for purposes of obtaining only the ASC 960 liability), whose underlying Core Projection(s) are based on an accounting discount rate set equal to the desired (constant) ASC 960 interest rate.
Accounting Expected Return: This is the accounting expected return on plan assets used for expense calculations under the accounting standard selected under the Accounting Methodology topic of the Asset & Funding Policy. Enter the rate(s) you wish to use in accounting valuations performed at future forecast valuation dates (note that the option to specify a change in the expected return rate is not available). Furthermore, this is the only option (i.e., you specify the rate, not a shift in the rate), other than leaving this column blank to reference the value entered, for the baseline valuation date, under the Accounting Methodology topic.

If you are sure that a particular liability is not relevant to your forecast, you may leave the corresponding interest rate column blank; for example, the column for Actuarial Liability Rate (or Change in Actuarial Liability Rates) could be left blank for a PPA forecast with no actuarial liability selected for calculation.