Benchmark Yields
The Benchmark Yields topic applies to plans with lump sum factor Benefit Formula Components, plans with cash balance and career average with indexation accrual definitions that vary with an asset benchmark, and plans with employee contributions that vary with an asset benchmark.
For plans with lump sum factor Benefit Formula Components, which are available in the pension modes, the Benchmark Yields topic allows you to input on which benchmark - corporate bonds, government bonds, or custom yields #1 or #2 - the lump sum benchmark yield will be based. ProVal will determine the lump sum experience interest rates to be used in the computation of the actual benefit payments paid from the plan (if the Benefit formula includes lump sum factor components), based upon the value of the actual (total, or nominal) lump sum benchmark yield generated for each forecast year by the Stochastic Forecast and the various parameter values entered under the Conversion Factors topic of the Projection Assumptions for the low, medium and high lump sum benchmark yield environments. You may base the generation of the lump sum benchmark yield on 30-year government bond yields, corporate bond yields, or custom yields provided that the Capital Market Simulation referenced by this Stochastic Assumptions set simulates bond yields on the desired basis. If no type of bond yields is simulated by the capital market simulation, lump sum experience interest rates, and thus lump sum factor values used to compute actual benefits paid, will not vary over the forecast period, nor will they vary, for any given forecast year, with variation in the lump sum experience interest rates in the low, medium and high benchmark yield environments.
Once you have selected an underlying Capital Market Simulation for this set of Stochastic Assumptions, you may select a basis for the Lump Sum Yield Benchmark based on parameter from the drop-down list, where the available choices depend on whether the selected Capital Market Simulation has generated yields for the government bond basis, the corporate bond basis, or both bases. If a Custom Capital Market Simulation is selected, Custom Yields #1 or #2 may also be available.
The benchmark yield experienced in the baseline year of the forecast, or year beginning on the baseline valuation date, will be used to derive lump sum values in the Benefit formula for benefits paid out the following year, or year beginning on the first forecast valuation date. Similarly, the (generated) benchmark yield experienced for the first forecast year, or year beginning on the first forecast valuation date, will be used for lump sum values for benefits paid out the second forecast year, or year beginning on the second forecast valuation date, and so forth. Thus, to determine lump sum values for actual benefits paid out during the baseline year of the forecast, referred to as year 0, ProVal requires an entry for the value of the lump sum benchmark yield the preceding year, which ends on the baseline valuation date. With this starting point, for all years thereafter, ProVal will determine the yield values, according to the bond basis you specified and the Capital Market Simulation results.
In addition to being used to vary lump sum experience interest rates in a forecast, the 30-Year Government Benchmark Yield for Year 0, Corporate Bond Benchmark Yield for Year 0, or with a custom Capital Market Simulator Custom Bond Benchmark Yield #1 or #2 for Year 0 will be used to determine valuation interest rates at future forecast valuation dates for each valuation interest rate (e.g., funding interest rate, solvency liability interest rates, accounting discount rate) specified to vary with that particular benchmark, as indicated by the setting of the Vary based on benchmark yield parameter (for the accounting expected return on assets, the Vary based on parameter) of the appropriate interest rate topic. When forecasting an interest rate is specified in this manner, the benchmark value produced by the capital market simulation for each forecast year is compared to the Year 0 benchmark yield entered and the valuation interest rate assumption is moved by this difference (in the case of a yield curve, moved in a parallel fashion) to determine the interest rate assumption to be used at the next forecast valuation date (that is, the shift is determined by the capital market simulation experience of the immediately preceding forecast year); this is done for each trial. Enter these initial lump sum benchmark yields for government and corporate bonds as numbers, e.g., 0.05, not as percentages.
If your benchmark yield represents the yield on 30-year U.S. Treasury bonds, then you may “look up” the appropriate rate by clicking the Look up button to access the “Look up 30-year Treasury rates” dialog box, which contains a list of historical current month rates for 30-year Treasury bonds (aka GATT rates). Click the appropriate row in the “Look up 30-year Treasury rates” dialog box and click Paste to paste this rate into the Benchmark Yields dialog box. For example, if your baseline valuation date is 1/1/2010, then Year 0 is calendar year 2009. If your plan provides for a one-year “stability period” and a “look back month” of August, then for lump sum values for benefits paid out in 2010, the appropriate interest rate is that shown in the list for August 2009.
For cash balance accrual definitions, career average with indexation accrual definitions, COLAs, employee contributions, and new entrant asset transfers that vary with an alternate benchmark, ProVal will determine the actual crediting rate based upon the value of the actual alternate benchmark generated for each forecast year by the Stochastic Forecast and the various parameter values entered under the Increase and Crediting Rates topic of the Projection Assumptions for the low, medium and high alternate benchmark environments. Select an asset class simulated by the Capital Market Simulation referenced by this Stochastic Assumptions set to be used as the Alternate Benchmark. The Alternate Benchmark
can optionally be adjusted by adding a Spread over benchmark, applying a Minimum rate, or applying Maximum rate.