In the OPEB mode of operation, this dialog box is simply entitled “Investment Return, Inflation”. “Benchmark Yields” refers to lump sum factor Benefit Formula Components, cash balance accrual definitions, career average with indexation accrual definitions, COLAs, employee contribution refunds, and new entrant asset transfers, none of which are found in OPEB mode.

Under this topic, you specify the assumed experience of the plan’s assets, over the period of the deterministic forecast, with respect to asset growth resulting from investment performance. You may specify the experience separately for each forecast year (up to 100 years, the number of years permitted in a Core Projection), starting with the baseline year (year beginning on the baseline valuation date and ending at the first forecast valuation date), which is denoted as Year 1. The experience of the second year (first forecast year), or year beginning on the first forecast valuation date, would be entered on the line for Year 2, and so forth. If the Asset & Funding Policy indicates different valuation and measurement dates, then you may specify separate accounting experience for each forecast year. Year 1 represents the year beginning on the first measurement date following the valuation date. Generally, this is the year beginning on the Asset & Funding Policy baseline measurement date (and ending at the first forecast measurement date). However, if the measurement date is more than one year beyond the valuation date, than this is the year beginning on the measurement date prior to the Asset & Funding Policy baseline measurement date. In that situation, the Year 1 inputs will be ignored in the forecast.

The Investment Return parameter at the top of this dialog box is the value of the assumed nominal (total) annual return on the market value of assets, that is, the sum of the real return on the fund’s investments and the inflation component of the return. The real return rate should reflect both the income return (the bond interest coupon rate and stock dividend yield rate) and the capital gains and losses on equity types of assets. Depending on the asset valuation method, the investment return may later be smoothed for valuation purposes. (See also Asset Smoothing Parameters.) Enter the investment return rate as a number, e.g., 0.09, not as a percentage. You may enter a rate as low as -1, that is, the entire fund is “wiped out”.

If you have specified separate funding and accounting investment returns (under the other Investment Return parameter), you will see separate columns for Funding Investment Return and Accounting Investment Return. The Funding Investment Return is the value of the nominal annual return on the market value of assets to be used for the funding forecast. The Accounting Investment Return is the value of the nominal annual return on the fair value of assets to be used for the accounting forecast.

Inflation is the assumed annual rate of inflation included in the Investment Return parameter value (or Funding Investment Return and Accounting Investment Return parameter values). Enter the rate as a number, e.g., 0.04, not as a percentage. ProVal will remove geometrically the value of this parameter from the value of the Investment Return parameter(s) to determine the real return(s) on the fund’s investments. The Inflation parameter value may range between -1, indicating severe deflation, and 1, indicating hyperinflation.

The Inflation specification also serves as an independent variable for interpolation purposes. That is, during a forecast, to determine plan liabilities that reflect values of variables affected by inflation (such as increases in salaries and plan benefits), ProVal interpolates among the low, medium and high inflation environments, as specified by the Inflation Environment parameters of the Increase & Crediting Rates topic (in OPEB mode, Increase Rates topic) of Projection Assumptions, to develop the single scenario representing an actual inflation rate as specified here. For example, if the Inflation Environment parameters of Projection Assumptions are 2% for the low inflation environment and 5% for the medium inflation environment and 4% actual inflation is specified here, then ProVal will derive values of inflation-dependent variables in a 4% inflation environment by interpolating between the 2% (low) and 5% (medium) inflation environment values. Refer to the Technical Reference article Interpolation of a Core Projection's results for details.

Note: The inflation experience assumption will be ignored if the Core Projection has been run with only one inflation environment (medium inflation), because then there will not be at least two points (as required by definition of “interpolation”).

Lump Sum Benchmark Yield is the assumed (nominal or total) annual interest rate, or benchmark (total) yield, to be used in the computation of lump sum factor Benefit Formula Component values for actual benefit payments paid from plan funds during the forecast period. The benchmark yield specified for Year 1, the baseline year of the forecast (or year beginning on the baseline valuation date), will be used for lump sum values in the Benefit formula for benefits paid out the following year, Year 2, the year beginning on the first forecast valuation date. Similarly, the benchmark yield specified for Year 2 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. See also the discussion of lump sum benchmark yields under the Lump Sum Factor Interest & Mortality topic of Projection Assumptions. Enter the yield as a number, e.g., 0.05, not as a percentage.

Alternate Benchmark determines the experience crediting/indexation rate to be used during the forecast period in the computation of cash balance accrual definitions, career average with indexation accrual definitions, explicit pension equity accrual definitions, COLAs, accumulated employee contributions, and new entrant asset transfers where alternate benchmark (rather than inflation) has been selected as the appropriate anchor in the Projection assumptions, under the Increase & Crediting Rates topic. Enter the benchmark as a number, e.g., 0.05, not as a percentage.

Valuation Benchmark determines the valuation assumptions to be used during the forecast period for assumptions that that vary with the benchmark yield as set in Projection Assumptions, under the Valuation Assumption Sensitivities topic. Enter the benchmark as a number, e.g., 0.05, not as a percentage.

In order to determine lump sum values for benefits paid out during Year 1, ProVal needs the assumed annual interest rate or Lump Sum Benchmark Yield for Year 0, the year ending on the baseline valuation date. 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 (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 Investment Return, Inflation & Lump Sum Benchmark Yield dialog box as the lump sum benchmark yield experienced in year 0. For example, if your baseline valuation date is 1/1/2003, then year 0 is calendar year 2002. If your plan provides for a one-year “stability period” and a “lookback month” of August, then, for lump sum values for benefits paid out in 2003, the appropriate interest rate is that shown in the list for August 2002. For a definition of the terms used and for guidance, refer to the U.S. Internal Revenue Code Section 417(e) regulations and related pronouncements.

For Investment Return, check the Use Dynamic asset allocation checkbox if investment returns for each forecast year will vary by funded ratio. Then in Dynamic Asset Allocation, mix numbers are assigned to funded ratio intervals and investment returns are entered for each asset mix.

The next Investment Return parameter is relevant only if the Asset & Funding Policy measurement date is not the same as the valuation date. The selected option indicates the relationship of accounting returns for the year beginning on each forecast measurement date to funding returns for the year beginning on the corresponding forecast valuation date. There are three options:

• Same returns for funding and accounting applies if the measurement date is the same as the valuation date and therefore the same returns will be used for funding and accounting. Select this option also if these dates are not the same but you do not choose to refine your forecast to reflect the fact that the year of experience between one forecast measurement date and the next does not cover the same calendar months as included in the year of experience between one forecast valuation date and the next.
• Weighted average accounting return produces an accounting investment return equal to the weighted average of the current and next year’s funding investment return, based on the number of months between the measurement and valuation dates.
• Separate funding and accounting returns provides separate columns, at the top of this dialog box, for entering separate values of investment return for funding and accounting, i.e., experienced over forecast years beginning on each valuation date (used to generate funding results) and forecast years beginning on each measurement date (used to generate accounting results).

Check the Use known asset values to override return  box to have ProVal project assets based on a known asset value at a specified point in time. First, enter the fraction of year, up to 2 years, from the Valuation Date.  Next, enter the known Funding assets at that point in time. If the fraction of year is greater than one, also enter the assets at end of 1st year and check if the end of year asset values  include contributions receivable. Check  Calculate based on funding assets to calculate the Accounting Assets based on the information entered for the Funding Assets. Uncheck to enter the fraction of year and amount of a known accounting asset value. Even if Calculate based on funding assets is checked, the accounting asset value at end of first year may be needed if the measurement date is after the valuation date and the fraction of year entered from the Valuation Date is after the first measurement year.

If partial year assets are entered, ProVal will do a fractional year projection. Aside from known contributions if a contribution schedule is used, ProVal will ratio cash flows based on the fractional period remaining. If a full year asset value is entered, ProVal will back into the return that produces the known end of period asset value. Also note that end of year additional contributions are not calculated for the first year if the fraction of year is greater than 1. 

If a fractional year override is entered, the Market Assets and Market Asset (Acctg) reports in Deterministic Forecast Exhibits and Stochastic Trial Exhibits, will display the known asset value as the initial asset value. Then, a fractional year's cashflow will be displayed to develop an end of year market value.