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