This asset valuation method is named Weighting of Market and Expected Actuarial Values for a funding asset valuation method, Weighting of Market and Expected Solvency Values for a (Canadian registered mode) solvency asset valuation method and Weighting of Market and Expected Market-Related Values for an accounting asset valuation method.

Under this option for valuing assets, the asset value used in the funding, solvency or accounting calculations (depending on which asset valuation method topic the option is selected for) reflects a weighting of market and expected values. For funding, the asset value will fall somewhere between market value and expected actuarial value and is equal to the sum of

• the Expected Actuarial Assets Weighting value multiplied by the expected actuarial asset value (for the Expected Actuarial Assets parameter value, enter the expected actuarial asset value as of the Valuation Date) and

• (1 – the Expected Actuarial Assets Weighting value) multiplied by the market value of assets.

For a Valuation Set, the market value of assets is entered under the Initial Asset Values topic; for a forecast, this entry is the market value of assets for the initial, or baseline, year and ProVal determines the market value at future valuation dates (or future measurement dates, for accounting assets). Enter a number between 0 and 1 (inclusive) for the Expected Actuarial Assets Weighting value. Similarly, this method develops a solvency asset value from this formula but using values of the Expected Solvency Assets Weighting parameter and the Expected Solvency Assets parameter. Likewise, an accounting asset value is developed from this formula using values of the Expected Market-Related Assets Weighting parameter and the Expected Market-Related Assets parameter; for the latter parameter, enter a value as of the Measurement Date. Note that a method whose asset value is defined as the expected value plus x% of the difference between expected and market values is coded by entering a weighting value equal to 1-x. For example, if the asset valuation method defines actuarial assets as expected assets plus 60% of the difference between market and expected asset values, enter 0.40 as the value of the Expected Actuarial Assets Weighting parameter.

For funding and solvency assets, the Expected Actuarial Assets Are Based On parameter and the Expected Solvency Assets Are Based On parameter, respectively, identify the asset base to be used to determine the expected actuarial value or expected solvency value. Under the Actuarial Value or Solvency Value options, the prior year actuarial value or solvency value will be used as the asset base to determine the expected asset value, including the expected return on assets. Under the Market Value option (accessible only if the “Expected Return” option is selected for the next parameter, Expected Actuarial Assets Definition – see the discussion below), the prior year market value will be used as the asset base to determine the expected asset value, including the expected return on assets.

The Expected Actuarial Assets Definition, or Expected Solvency Assets Definition for solvency calculations, is used during a forecast to define the methodology for calculating the prior year investment return and thus developing the expected asset value at future valuation dates. The expected asset value is defined as the prior year asset value plus Cash Flow (benefit payments plus contributions less administrative expenses) plus an investment return on the plan fund. Last Year’s Assets (the prior year asset value) is defined according to the setting of the Expected Actuarial Assets Are Based On parameter or the Expected Solvency Assets Are Based On parameter (see the discussion above). Typically, this is last year’s actuarial or solvency value, but if the return for the expected assets definition parameter is the “Expected Return” option (see below), market value may be chosen as an alternative basis for last year’s asset value.

For accounting assets, the Expected Market-Related Value Return parameter is used during a forecast to define the methodology for calculating the prior year investment return and thus developing the expected market-related value of assets at future valuation dates.

The options for defining the investment return, to develop the expected asset value, are as follows:

• Expected Return (for accounting assets, this option is named Expected Return on Assets): Expected asset values are calculated based on the value of the Expected Return on Assets parameter of the Accounting Methodology topic, for accounting purposes, and the valuation interest rate(s) for funding and solvency purposes. Note for solvency assets: the ongoing liability valuation interest rate(s) are used. Under this option, you may select whether the prior year asset value is the actuarial or solvency value or, alternatively, market value. In the U.S. qualified mode, if the “PPA” law type is selected, asset values will be calculated based on the alternative interest rate entered under the Actuarial Liability topic of the Valuation Assumptions, if an alternative interest rate has been specified; otherwise the PPA funding effective interest rate will be used. Note that although it is possible to use this method in the U.S. qualified mode under the “PPA” law selection, in general, it is expected that the N-Year Average method will be used to value assets for purposes of PPA calculations.

• Income Only (available for funding and solvency assets only): Expected asset values are calculated based on the income portion of the investment return rate, entered as Income Return parameter values, for a Deterministic Forecast, under the Asset Smoothing Parameters topic of Deterministic Assumptions or, for a Stochastic Forecast, entered as the Income Return parameter value for each asset class included in the referenced Capital Market Simulation.

• Income plus Realized Capital Gains (available for funding and solvency assets only): Expected asset values are calculated based on the income portion of the investment return rate plus the realized capital gain (or loss). The income portion is entered as Income Return parameter values (see the, preceding, discussion of the “Income Only” option) in the Deterministic Assumptions or Capital Market Simulation. The realized capital gains are calculated as the total capital gains – defined as the total return on the plan fund less the income return – multiplied by the assumed turnover fraction specified, for a Deterministic Forecast, under the Asset Smoothing Parameters topic of Deterministic Assumptions or, for a Stochastic Forecast, under the Asset Classes topic of the referenced Capital Market Simulation.

• Income plus Realized Capital Gains, historical basis (available for funding and solvency assets only): Expected asset values are calculated based on the income portion of the investment return rate plus the realized capital gain (or loss). The income portion is entered as Income Return parameter values (see the, preceding, discussion of the “Income Only” option) in the Deterministic Assumptions or Capital Market Simulation. The realized capital gains are calculated as the total capital gains – defined as the market value of assets less the book value of assets (i.e., less the cost basis for the proportion of the portfolio that is sold) – multiplied by the assumed turnover fraction specified, for a Deterministic Forecast, under the Asset Smoothing Parameters topic of Deterministic Assumptions or, for a Stochastic Forecast, under the Asset Classes topic of the referenced Capital Market Simulation. Enter the Book Asset Value (“starting” book value) for the year beginning on the Valuation Date; ProVal will calculate the book value at future valuation dates in the forecast. (By way of contrast, if this, historical, basis is not used, the difference between market value in the year of sale and market value in the prior year – rather than a fraction of the difference between market and book values in the current year – is deemed to be the realized capital gain to be recognized.)

• Historical Compound Average Return (for accounting assets, this option is named Historical Compound Average): Expected asset values are calculated by projecting assets forward based on a compound average of historical returns. To determine the compound average at future valuation dates in the forecast, ProVal simulates returns for future years and combines them with historical returns for past years, that is, for years ending on or prior to the Valuation Date, or ending on or prior to the Measurement Date for accounting assets. Thus the historical returns of prior years are required input values, entered by clicking the Historical Returns button and completing the parameters in the accessed (Historical Returns) dialog box. Enter the number of Years in Averaging Period for the compound average return; a spreadsheet becomes accessible in which to enter the Prior Returns for each relevant prior year (one year less than the number of years in the averaging period). Year -1 is the year ending on the Valuation Date or, for accounting assets, the year ending on the Measurement Date; Year -2 (relevant for N greater than 2) is the year immediately preceding the year ending on the Valuation Date or Measurement Date, and so forth. The simulated returns for future years, ending after the Valuation Date or Measurement Date are based on the Investment Return parameter values entered, for a Deterministic Forecast, in the Deterministic Assumptions or, for a Stochastic Forecast, generated by the referenced Capital Market Simulation.

Check the Exclude administrative expenses from expected assets box to exclude administrative expenses, and in the U.S. qualified mode the PBGC premium (if any), from cash flow in the development of actuarial assets (for a funding asset valuation method) or market-related value of assets (for an accounting asset valuation method) at future valuation dates in a forecast. In the Canadian registered mode, this check box is available only for funding and accounting asset valuation methods (not for a solvency asset valuation method).