What is a commuting value?
The Commutated Value is a term that is often used on the financial planning strategy, especially for managing pension plans. The term applies to the net current value that is associated with the funds that are maintained in the plan. Identifying the commuting value is important because it allows fund administrators to understand how much money it must now be assigned to the pension plan and locked for specific interest rates to provide appropriate payments for members planning at different points in the future.
The general idea of a commuting value is to cover the amount of funds that must be held in the pension fund to ensure that the fund meets its future obligations. This is partly achieved by identifying the interest rate, which will apply to retirement funds and reflects how many interest income accumulates from now on and the date in question. This allows you to understand at which level contributions are needed to ensure a certain amount, given the interest rate,that will apply.
Calculation of the commuting value requires an understanding of what is happening with the interest rate that applies to the funds already invested in the plan. Usually, if the interest rate increases during the considered period, this will mean that a larger amount of interest income will be created and less in the contributions is required to achieve the desired goal. At the same time, lower interest rates will mean that the fund must receive more contributions to maintain the same level of paycheck.
Determination of the value of the commuting value is slightly easier if the investment that is carried out on behalf of the fund is primarily equipped with fixed revenues. Usually, at least part of these investments will provide a strong income for pension. In addition, fund administrators may also decide to invest in shares that provide a certain type of variable return, hopefully it is considered in accordance with the level or volatility levelassociated with this particular asset. This means that when the commuting value is projected, it is necessary to consider both fixed and variable revenues of investment, which allows for various scenarios that could occur and reduce revenues generated on some of these investments.