Yield Curve for 2008 valuation

[Dinosaur]

If we elect to use the yield curve for a November 1, 2008 valuation (using the valuation month), are the rates 7.11%, 8.23% and 7.42%? These rates would definitely lower the Funding Target.

Are these rates used for all purposes of the valuation calculations (i.e. AFTAP, benefit restrictions under Section 436, PBGC). How long are we stuck with using the yield curve (versus the segment rates)?

When does the plan sponsor have to make this election to use the yield curve.

Any other comments?

[david rigby]

I'm confused (OK, that's not difficult).

I get the segment rates or the yield curve from here: http://www.irs.gov/retirement/article/0,,id=123231,00.html

Where did you get those rates?

[Dinosaur]

I'm confused (OK, that's not difficult).

I get the segment rates or the yield curve from here: http://www.irs.gov/retirement/article/0,,id=123231,00.html

Where did you get those rates?

I got those rates from our CCH book (IRS Spot Segment Rates). These are derived from the rates you referenced.

What actual rates (if using the yield curve) would you use for a 11/1/2008 valuation?

[Effen]

If you are using the yield curve each year has its own rate. Instead of 3 rates, you have 99. I think most people are using the .5, 1.5, 2.5, ... but I can't speak for everyone.

If you use the yield curve it is part of your funding method and therefore can only be changed every 5 years with automatic approval. (RP 2000-42) However, you actually get a free change for 2008 and another free change for 2009. Therefore, you can use the full yield curve for 2009 even though you didn't use if for 2008, but if you do, you are probably stuck with it for 5 years. Because the yield curve doesn't have the averaging of the segment rates, it is much more volatile and could end up costing the sponsor more in 2010-2012. However, if the client is in survival mode, it might be worthwhile to take a look.

The sponsor will need to elect to use it, so MAKE SURE they understand it.

They have until you submit the SB to make the election. Therefore, for calendar year plans you can run the numbers both ways and they can chew on it until 9/15/2010 before they need to actually decide. You might also want to look at redoing 2008 based on the yield curve. That way if they decide before 9/15/09, they will know the impact on 2008 and 2009 and should have a pretty good idea what 2010 might look like. That way they are really only flying blind on 2 of the 5 years.

[Dinosaur]

Thanks Effen. I was hoping it would be easier than that. So I guess there is no easy way to calculate the liabilities for yield curve.

Are many people using the yield curve? Or, are you generating your own program on EXCEL or are there valuation systems out there that can handle these calculations?

[Effen]

I think the better (more expensive) valuation systems will handle the yield curve fairly easily, however the “small plan” systems probably will not.

We use both Proval and ASC. With Proval it is just a click of a box, with ASC it is not possible.

Personally, I wouldn't recommend it for small plans (tax shelter) unless you have a fairly sophisticated client. It’s a pay me now or pay me later thing. I think the contribution has to be more than just inconvenient before you suggest the yield curve.