Jump to content

Calculating Normal Cost - Segment Rate to Be Used


Recommended Posts

Good morning everyone!  I just wanted to make sure we are using the correct segment rate for the calculation of the Normal Cost.

The calculation should be:

Contribution Credit x The Assumed Interest Rate (to the power of the number of years until retirement)
--------------------------------------------------------------------------------------------------------
Segment Rate (to the power of the number of years until retirement)

For the segment rate being used, it should be:

  • First segment rate: 0-5 years from retirement
  • Second segment rate: 6-20 years from retirement
  • Third segment rate: More than 20 years from retirement

Thanks in advance for confirming

Link to comment
Share on other sites

1st segment rate is used for benefits payable in less than 5 years from the valuation date.

2nd segment rate is used for benefits payable in 5 years and less than 20 years from the valuation date.

3rd segment rate is used for benefits payable in 20 years or more from the valuation date.

A benefit expected to be paid exactly 5 years from the valuation date would be discounted using the 2nd segment rate.

Link to comment
Share on other sites

If you're only talking about whole years, then yes. However consider that retirement benefits are often paid in the form of a monthly annuity. In that case you might have benefits that are payable in more than 4 but less than 5 years. Those benefits would be discounted using the 1st segment rate.

Given that this is a cash balance plan, you might be using an assumption of 100% lump sum benefits paid at normal retirement age. As always, check with your actuary to see what assumptions are reasonable.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...