Cash Balance Projection Rate

[nancy]

When preparing a cash balance val should the projection rate be the same as the actual crediting rate for the year? For example, a 12/31/09 val credits at the 30 year treasury from the prior November (4%), but when the val is completed you know the November, 2009 30 year treasury is 4.31%. Can you use 4.31% in the val for your projection?

[carrots]

If the crediting rate is variable, tied to an index, I would think that you should use your best estimate of what that variable rate will be in the future. Presumably you could use a single rate for all future years, or even use a different rate for each future year.

[Effen]

I agree with Carrots, the actuary can use any reasonable estimate for the future assumed crediting rate.

We typically use the rate in effect when we do the valuation, so in your example, we would use the 4.31% for our assumption. In our assumption section on the report we say we use the 30-yr rate in effect when we do the valuation, therefore when the rate changes every year, we do not call that an assumption change.

We have other plans where we just use a flat 5% as the assumption - it just depends on the situation.

However, we have been running into problems due to the spread between the 30-yr rate and the segment rates. You can have situations where even 150% of the funding target is still less than the sum of the cash balance accounts, which depending on your interpretation of the maximum deductible limit, can be problematic.