Accounting service cost and interest cost are calculated in Valuations and Core Projections and are available as results in both individual results and output. The following parameterization is required to obtain Service Cost and Interest Cost results from a Valuation/Core Projection:
- the accounting interest rate assumption is either a constant rate or a spot rate yield curve
- projected benefit payments are calculated
The calculation of Interest Cost and Service Cost in a Valuation/Core Projection differs from the calculations performed in a Valuation Set or Forecast where the calculations are done in aggregate for all participants together rather than separately for each individual. In a Valuation Set/Forecast, the Asset & Funding Policy has a parameter to specify the interest cost method as either the effective discount rate or individual spot rate (for more details on the Asset & Funding Policy methods, see here). The method for calculating Service Cost and interest in Valuations/Core Projections is most similar to the individual spot rate method in a Valuation Set/Forecast if calculated on a PBO basis.
The Interest Cost and Service Cost will be on the Modified Teilwert basis if run. Otherwise, calculations will be on the Projected Benefit Obligation (PBO) basis.
Calculation of Service Cost
The PBO service cost is determined for each participant as:.
The Modified Teilwert service cost is determined for each participant as (Modified Teilwert premium) x (1+i).
where:
n is the last year the participant receives a benefit payment
Bt is the benefit payment underlying the service cost in year t
v is the discount factor 1/(1+i)
it the interest rate applicable in year t
k is the average benefits timing factor
Calculation of Interest Cost
The interest cost for each inactive participant and active participant on a PBO basis is determined as:
The Modified Teilwert interest cost for active participants is calculated as (Modified Teilwert Liability x i) - B0 x [(1+i)1-k-1]
where:
n is the last year the participant receives a benefit payment
Bt is the benefit payment underlying the Projected Benefit Obligation (PBO) in year t
v is the discount factor 1/(1+i)
it the interest rate applicable in year t
k is the average benefits timing factor