Effective interest rate under S430(h)(2)

[flosfur]

How are you computing the effective interest rate, short of actually doing a separate valuation and determining a single rate by trial & error!?

[tymesup]

Our Excel spreadsheet does a separate calculation at the effective interest rate. We have a macro that invokes Goal Seek. However, the spreadsheet is so honking big that the macro takes a while to run. We're back to trial and error using precision to x.yz%

More work we can't get paid for.

[Andy the Actuary]

Performing separate valuation using trial/error on spreadsheet to determine effective rate and taking certain license. For example, if a Plan has fewn many actives and TVs and few retirees with small liaiblities, you might simply use the segmented rate calculation as a reasonable proxy for your single rate calculation for retirees. The segmented rate calculation of liabilities for the retirees would recognize the option selected. Your overall calculation won't be effected if you're using x.yz % precision. The detemination of the effective interest rate is is one of those calculations which unless you incorporate avagadro's number of decimals, you're not going to get exact agreement. On Schedule SB, I believe x.yz% is the requested precision for reporting of the effective interest rate.

Given the limited uses of the effective interest rate, it was hoped the IRS would offer up some small plan approximation to avoid what in reality is simply grunting.

[tymesup]

Avagadro's number, you've earned your propeller today. I was disappointed to find out The Mole was not a chemistry show.

Depending on whether you calculate your liabilities to dollars or cents, the rate should converge much faster than that. Now, if we could just get some negative cash flows, then we could have multiple solutions. A cash refund annuity might have multiple rates, too.

Thanks for the reminder about inactives. Our current spreadsheet equates the liabilities for actives and ignores the inactives. One more thing to program.

[flosfur]

Performing separate valuation using trial/error on spreadsheet to determine effective rate and taking certain license. For example, if a Plan has fewn many actives and TVs and few retirees with small liaiblities, you might simply use the segmented rate calculation as a reasonable proxy for your single rate calculation for retirees. The segmented rate calculation of liabilities for the retirees would recognize the option selected. Your overall calculation won't be effected if you're using x.yz % precision. The detemination of the effective interest rate is is one of those calculations which unless you incorporate avagadro's number of decimals, you're not going to get exact agreement. On Schedule SB, I believe x.yz% is the requested precision for reporting of the effective interest rate.

Given the limited uses of the effective interest rate, it was hoped the IRS would offer up some small plan approximation to avoid what in reality is simply grunting.

Since it has very limited use (for crediting interest to SB balances and discounting receivable contributions...), why didn't the regulators simply pick a fixed rate or a rate linked to bond rates or the mid-segment rate for this purpose! But then that would be too simple!

I guess we will have to up the valuation fees for 2008 & beyond.

[Andy the Actuary]

Since it has very limited use (for crediting interest to SB balances and discounting receivable contributions...), why didn't the regulators simply pick a fixed rate or a rate linked to bond rates or the mid-segment rate for this purpose! But then that would be too simple!

In the halcyon days of IBM 360 mainframes and Curta calculators, laws were not crunch demanding. Today's laws could not have been applied without much estimation and approximation. If you as an actuary could not program a mainframe, you went to MIS (then called EDP=electronic data processing). EDP would then want to conduct a feasibility study to determine whether or not electronically systemetizing your application was cost-justified. By the time EDP got around to implementing your application, your application was either obsolete or you forgot what it was. Ergo, you learned to program the mainframe but didn't tell anybody (let alone show up EDP). As far as legislators were concerned, applying their laws still had to be doable.

Since the PC, however, laws have become more and more complicated and crunch demanding figuring whatever is created can be easily accomplished. While this may not be the case, it is clearly the perception.

The real question is given the complexity of the laws and the attendant crunching, will any governing body ever have the expertise to audit results in a meaningful way.