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: For funding liabilities, 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. For statement/compliance, the interest rate for the 12 months prior to the valuation date is used. For BOY valuations, the Prior Interest Rate is used and for EOY valuations, the Current Interest Rate is used. In order for calculations to work properly, a value must be entered into all three Interest Rate fields of the CASHBAL plan specifications screen. 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 benefit is determined in a beginning of year and an end of year valuation for funding benefit and statement/compliance purposes. Example 1 - Beginning of Year Valuation Plan Specifications: Valuation Date: 1/1/2022 CB Conversion APR (2.80%, RP22C U, 62): 203.495 CB Conversion APR from Prior Year History/Ext A (4.00%, RP21C U, 62): 178.103 Prior Interest Rate: 4.00% Current Interest Rate: 2.80% Assumed Future Interest Rate: 3.50% Disregard Prior Accrued: Yes Participant information: Attained Age on valuation date: 56 Future Years of Interest Credit: 6 Retirement Age: 62 Prior Accrued Benefit: 74.23 Prior Balance: 11,080.39 Prior Contribution: 944.00 Earnings: 443.22 BOY CB Balance: 12,467.61= (11,080.39 + 944.00 + 443.22) Expected Contribution: 4,500.00 FUNDING BENEFITS 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. The remaining years in the projection period are credited using the Assumed Future Interest Rate. BOY Accrued Benefit: = BOY CB Balance x (1 + Current Interest Rate) x (1 + Assumed Future Interest Rate) ^ (RA - (AA+1)) / CB Conversion APR = 12,467.61 x 1.028 x 1.0350^5 / 203.495 = 74.80 Expected Benefit Accrual: = Expected Contribution x (1 + Assumed Future Interest Rate) ^ (RA - (AA+1)) / CB Conversion APR = 4,500.00 x 1.035^5 / 203.495 = 26.26 EOY Accrued Benefit: = Accrued Benefit + Expected Benefit Accrual = 74.80 + 26.26 = 101.06 STATEMENT/COMPLIANCE BENEFITS For BOY valuations, the BOY CB Accrued Benefit is compared with the Prior Accrued Benefit to calculate the accrual during the prior plan year. BOY CB Accrued Benefit: = BOY CB Balance x (1 + Prior Interest Rate) ^ (RA - AA) / Prior CB Conversion APR = 12,467.61 x 1.04^6 / 178.103 = 88.58 Prior Accrued Benefit: 74.23 Accrual for prior plan year: = BOY CB Accrued Benefit - Prior Accrued Benefit = 88.58 - 74.23 = 14.35 Example 2 - End of Year Valuation Plan Specifications: Valuation Date: 12/31/2021 FUNDMETH \ Use BOY accrued benefit for funding target: No CB Conversion APR (5.50%, RP21C U, 62): 153.732 Current Interest Rate: 2.88% Assumed Future Interest Rate: 4.50% Disregard Prior Accrued: Yes Participant information Attained Age on valuation date: 55 Future Years of Interest Credit: 7 Retirement Age: 62 Prior Accrued Benefit: 34.39 Prior Balance: 3,720.56 Expected Contribution: 1,200.00 Earnings: 107.15 Total EOY CB Balance: 5,027.71 = (3,720.56 + 107.15 + 1,200.00) FUNDING BENEFITS Begin of Yr Accrued Benefit: = (Prior Balance + Earnings) x (1 + Assumed Future Interest Rate) ^ (RA - AA) / CB Conversion APR = (3,720.56 + 107.15) x 1.045^7 / 153.732 = 33.88 EOY Accrued Benefit: = EOY CB Balance x (1 + Assumed Future Interest Rate) ^ (RA - AA) / CB Conversion APR = 5,027.71 x 1.045^7 / 153.732 = 44.51 Funding Accrual for 2021: If FUNDMETH \ Use BOY accrued benefit for funding target is set to No, accrual is calculated as the difference between the EOY Accrued Benefit and the Prior Accrued Benefit. = EOY Accrued Benefit - Prior Accrued Benefit = 44.51 - 34.39 = 10.12 If FUNDMETH \ Use BOY accrued benefit for funding target is set to Yes, accrual is calculated as the difference between the EOY Accrued Benefit and the Begin of Yr. Accrued Benefit. = EOY Accrued Benefit - Begin of Yr Accrued Benefit = 44.51 - 33.88 = 10.63 STATEMENT/COMPLIANCE BENEFITS BOY CB Accrued Benefit: = (Prior Balance + Earnings) x (1 + Current Interest Rate) ^ (RA-AA) / CB Conversion Factor = (3,720.56 + 107.15) x 1.0288^7 / 153.732 = 30.37 EOY CB Accrued Benefit: = (Prior Balance + Earnings + Expected Contribution) x (1 + Current Interest Rate) ^ (RA-AA) / CB Conversion Factor = (3,720.56 + 107.15 + 1,200.00) x 1.0288^7 / 153.732 = 39.90