; FAQ 937: Cash Balance - Assumed Future Interest Rate field

FAQ 937: Cash Balance - Assumed Future Interest Rate field

Problem:

How does the Cash Balance Assumed Future Interest Rate affect the calculation of benefits?


Solution:

The field Assumed Future Interest Rate allows users to project the future accumulation in cash balance accounts at a different rate than the Current Interest Rate field.

In order for calculations to work properly a value MUST be entered in this field. Therefore, if you don't plan to assume a different rate than the Current Interest Rate value, enter the Current Interest Rate value in the Assumed Future Interest Rate field.

The following examples show how the calculation of the accrued annuity benefits is determined in a beginning of year and an end of year valuation.

Example 1 - Begin of Year Valuation

Valuation Date - 1/1/2021
Cash Balance Assumptions - 2.80% / RP21C U, Conversion factor at 62 - 202.663
Current Interest Rate - 2.80%
Assumed Future Interest Rate - 3.50%
Disregard Prior Accrued - Yes
Attained Age on valuation date - 56
Future Years of Interest Credit - 6
Retirement Age - 62
Participant information:
Prior Balance - $11,080.39
Prior Contribution - $944.00
Earnings - $310.25
Total - $12,334.64 (11,080.39 + 944.00 + 310.25)

BOY Accrued Benefit: 12,334.64 x 1.0280 x 1.0350 ^ 5 / 202.663 = $74.31

For a BOY valuation, the first year of the projection period would be credited at the Current Interest rate since that rate is known for the plan year

Expected contribution - $944.00
2021 Expected Benefit Accrual: 944.00 x 1.0350 ^ 5 / 202.633 = $5.53

Total EOY benefit: $74.31 + $5.53 = $79.84

Example 2 - End of Year Valuation

Valuation Date - 12/31/2020
'Use BOY accrued benefit for funding target' is set to 'No' (Found on FUNDMETH screen)
Cash Balance Assumptions - 5.50%/RP20C U, Conversion factor at 62 - 153.832
Current Interest Rate - 2.88%
Assumed Future Interest Rate - 4.50%
Disregard Prior Accrued - Yes
Attained Age on valuation date - 55
Future Years of Interest Credit - 7
Retirement Age - 62
Participant information:
Prior Accrued Benefit - $34.36
Prior Balance - $3,720.56
Expected Contribution - $1,200.00
Earnings - $107.15
Total - $5,027.71 (3,720.56 + 107.15 + 1,200.00)

EOY Accrued Benefit - 5,027.71 x 1.045 ^ 7 / 153.832 = $44.48

Accrual for 2020 (EOY Accrued Benefit - Prior Accrued Benefit) = $44.48 - $34.36 = $10.12