Using Interest Methods

This chapter provides an overview of interest methods and discusses how to set up interest methods.

Understanding Interest Methods

Interest methods are used with two types of accounts that accrue interest over time: cash balance accounts and employee accounts.

The cash balance accounts method applies interest to an employee’s hypothetical pension account.
The employee accounts method applies interest to an employee’s actual contributions.

You do not use interest methods with the functions that use actuarial assumption sets because assumption sets already incorporate interest rules.

Setting Up Interest Methods

To set up interest methods, use the Interest Method (INTEREST_METHOD) component.

This section provides an overview of the pages used to set up interest methods, lists the pages used to set up interest methods, and discusses setting rules for applying the interest rate over periods.

Understanding the Pages Used to Set Up Interest Methods

Pension functions that involve employee accounts or cash balance accounts must track interest credited to the accounts. After you establish an interest method, you can reference its rules on the Cash Balance Acct (cash balance account) and Emp Acct (employee account) pages.

Pages Used to Set Up Interest Methods

Page Name	Object Name	Navigation	Usage
Interest Method 1 of 2	PA_INTEREST_P1	Set Up HRMS, Product Related, Pension, Calculation Rules, Interest Method, Interest Method 1 of 2	Set the interest rate.
Interest Method 2 of 2	PA_INTEREST_P2	Set Up HRMS, Product Related, Pension, Calculation Rules, Interest Method, Interest Method 2 of 2	Set rules for applying the interest rate over full periods and partial periods.

Setting the Interest Rate

Access the Interest Method 1 of 2 page.

Interest Rate Method

Level Rate	Select this option unless you use your own user code.
User Code	Select this option to use your own user code.

Level Interest Rate - Rate Source

Constant Rate	Enter the annual or monthly constant interest rate.
Table Lookup	This option provides a single rate to use at all times. It is not commonly used. More likely you want to vary the interest rate—for example, to get the federal midterm rates at the beginning of each year. In this case, use a program-generated table lookup instead.
Custom Statement	Enter an alias.
Program Generated Table Lookup	The option enables you to look up interest rates that vary over time. For example, if you apply interest based on the federal midterm rates that are in effect on the first day of the month, you vary the rate. Therefore, you use a program-generated table lookup. For this method, your lookup is always based on a date. The term program-generated refers to the fact that the function using this interest rule has to provide the date for each period.

Note. The text box for program-generated table lookups prompts against this type of table lookup. If you do not see the alias you’re looking for, verify that you have identified the lookup as a program-generated table lookup on the Table Lookup Alias page.

Setting Rules for Applying the Interest Rate over Periods

Access the Interest Method 2 of 2 page.

Full Period Technique

No Interest

You can use this option for both full and partial periods.

Fractional Interest for Period

If you use this option for full periods, you can approximate the interest that would be credited if contributions were collected at intervals throughout the period. For example, if contributions were collected monthly over an annual period, employees would receive 12 months of interest on the first contribution, then 11 months of interest on the next, and so on until they receive one month of interest on the last month. An approximation of the total interest on the consolidated annual amount would be the average amount of interest, which would be five and a half months of interest, or 11/24 of the year. You enter this fractional amount in the text boxes next to this option—for example, enter 11 / 24.

With fractional interest, you can select compound or simple interest:

When you select Compound Interest, the interest formula is:
```
[Amount × (1 + rate) period fraction] − amount
```
When you select Simple Interest, the interest formula is:
```
Amount × rate × period fraction
```

Partial Period Technique

Partial Interest, Using

This option prorates interest over the number of days in the partial period.

With partial interest, you can select compound or simple interest:

When you select Compound Interest, the interest formula is:
```
[Amount × (1 + rate) period fraction] − amount
```
When you select Simple Interest, the interest formula is:
```
Amount × rate × period fraction
```