Calculation of interest on expected benefit payments reflects (1) the benefit payment frequency and annuity payment timing entered in the pension modes under the Plan Attributes topic and (2) the claims timing entered in OPEB mode in the Valuation Assumptions. The market value of assets, however, is rolled forward in a forecast assuming that (actual, or cash) benefit payments are made exactly in the middle of the year. In the pension modes, because (typically) the assumed frequency is monthly and the timing is beginning of the month, the average payment timing of expected benefit payments is not quite 6 months into the year and thus a small loss (caused by this timing discrepancy) is produced at future valuation dates in a forecast.

Interest on expected benefit payments is calculated using a compound interest adjustment, consistent with the methodology used to compute interest for fractions of a year when rolling assets forward in a forecast.

Note: Prior to the 2/16/2006 release of version 2.24, ProVal computed interest on expected benefit payments using a simple interest adjustment. Therefore, values for interest-related Output variables produced by Valuation Set Exhibits / Deterministic Forecast Exhibits run in post-2/16/2006 versions of ProVal may differ from values saved by the referenced Valuation Set / Deterministic Forecast, if the Valuation Set or Deterministic Forecast had been run in a version prior to the 2/16/2006 update.

 

For both active and inactive participants, in all ProVal modes, expected benefit payments from a Valuation or Core Projection are on a “cash” basis, i.e., equal to the sum of expected benefit checks for the year, and are assumed paid, on average, in the middle of the year. Therefore, interest is calculated using a 0.5 (half year) adjustment. (See the Technical Reference article Expected benefit payments for more information about assumed benefit payment timing and the formula for computing cash basis expected benefit payment amounts.)

Interest on expected benefit payments is calculated differently for ERISA full funding limits and the additional funding charge (U. S. qualified mode) and accounting expense, as noted in the separate discussions that follow.

ERISA full funding limits and additional funding charge (U.S. qualified mode)

To determine end-of-year current liability, the interest rate used to calculate interest on estimated benefit disbursements (expected benefit payments) is specified in the exhibits and may be the funding rate, the RPA current liability rate, the alternative maximum basis current liability rate or the OBRA current liability rate, depending on the type of calculation. To determine end-of-year current liability assets, the interest rate used to calculate interest on expected benefit payments is always the funding rate. The user’s parameter choice for rolling forward current liability assets (specified under the Benefits and Rounding topic of the Asset & Funding Policy) determines whether end-of-year current liability assets are calculated using expected benefit payments on the current liability basis or on the funding basis. In any case, interest on expected benefit payments is calculated to the end of the plan year as:

cash basis expected benefit payments * {[(1+ rate) ** 0.5] – 1}.

If the Contribution Policy topic of the Asset & Funding Policy indicates that the fraction of the year from the valuation date to the end of the plan year ("PYTIME") is less than 1 (such as for a mid-year valuation), ProVal’s accrued and current liabilities as of the valuation date reflect normal costs and accruals, respectively, through the valuation date, as well as payment of a pro-rata portion of expected benefit payments prior to the valuation date. However, ProVal’s expected benefits payments reflect a full 12 months following the valuation date. (See the discussion in the Technical Reference article Mid-Plan Year Valuations.) Thus only a pro-rata portion of expected benefit payments should be reflected in projecting liabilities to the end of the plan year and that portion of benefit payments is assumed paid, on average, in the middle of the period between the valuation date and the end of the plan year. For example, for a valuation three quarters of the way through the plan year (PYTIME = 0.25), the expected benefit payment value for the period from the valuation date through the end of the plan year is calculated as:

0.25 * cash basis expected benefit payments,

and the interest on expected benefit payments through the end of the plan year is assumed to be

0.25 * cash basis expected benefit payments * {[(1+ rate) ** (0.25 * 0.5)] – 1}.

Accounting expense

The interest rate used for this calculation is specified in the exhibit and may be the PBO discount rate or the rate of expected return on assets, for calculation of interest cost or the expected return on assets, respectively. For example, interest on expected benefit payments for determining interest cost is calculated as:

PBO cash basis expected benefit payments * {[(1+ PBO discount rate) ** 0.5] – 1}.

If the measurement date (presumed beginning date of the fiscal, or tax, year) is later than the valuation date, there is no impact on the calculation of interest on expected benefit payments, because, for expense purposes, the valuation expected benefit payments are always assumed to be representative of the tax year, even though these benefit payments may have, technically, been calculated for a different period (the plan year).

If there is less than one year from the valuation date to the end of the plan year (PYTIME is less than 1) or less than one year from the valuation date to the end of the tax year, for expense purposes, a full year’s expected benefit payments, assumed payable in the middle of the tax year, is always reflected in projecting benefit obligations to the end of the year. Thus there is no adjustment either to the 0.5 interest factor or to the value of expected benefit payments used in the interest calculation.

 

Note: Under versions of ProVal prior to 2.16, before calculating interest on expected benefit payments for pension Valuation Sets and Deterministic Forecasts, ProVal may have converted expected benefit payments (computed in the corresponding valuations and core projections as a present value at the beginning of the year) to a cash basis (assumed paid in the middle of the year). Applicability of the conversion process depended upon the mode and the database record’s status (active versus inactive). See the Technical Reference article Expected benefit payments for details.