In Exhibit 26, why is the capital market assumption of a 4.90% return on the PV of Pension Liabilities not a negative number?
Why would you discount the pension’s liabilities (or anything else, for that matter) with a negative discount rate?
Exhibit 26 is referring to annually compounded returns, not discount rates.
The purpose of the entire reading is to select assets with consideration given to the liabilities profile. Determining assets that correlate with the liabilities for the purposes of hedging or maintaining high correlation rates means using negative numbers for the return and correlation aspects of the liability profile. Otherwise any Optimizer you would use would view the liabilities as another potential asset class from which to obtain returns.
It’s why the conservative asset allocation under the Surplus Optimizing strategy is 90+% US Corp Bonds- because they have an almost perfect negative correlation with the liability profile
The column heading of PV (Liabilities) makes it appear that they’re talking about the discount rate used to arrive at the present value.