Calculating Normal Cost - Segment Rate to Be Used

[metsfan026]

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)
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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

[C. B. Zeller]

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.

[metsfan026]

Got it.  So it's 4 years or less, between 5 and 19 years and then 20+ years

[C. B. Zeller]

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.