Discount Rate and Pension Expense

CFA Level II
#1

How does an increase in the discount rate lower pension expense? FSA CFA text pg 141 #25 isn’t discount rate x beggining PBO = interest expense? I chose B, correct ans. is C

#2

A higher discount rate will reduce the PV of your PBO, reducing pension expense.

#3

thanks, bpdulgo so the decrease in PBO happens first, then the pension expense is calculated just want to make sure I am thinking about it correctly

#4

pension expense has two components. Service Cost -> which is affected by the PBO - when discount rate increases, PBO decreases -> so Service Cost component reduces. Interest Cost = Beginning PBO * Discount rate -> If the beginning PBO - which still has not reduced is big enough -> Interest expense might show an year on year increase - but usually PBO (and service Cost) being the bigger part -> Pension expense would largely reduce.