Could someone help me to understand what is the impact on the risk ability when the pension plan increase the discount rate for the calculation of the NPV of the liability plan ? Is it positive or negative for the pension fund ?
the present value of liabilities would reduce… so risk taking ability increases… others pls correct if wrong
pv = x / 1 + i … if denominator increases, pv of pension liab decreases; thus increasing the ability to take risk.
From an ALM point of view, the objective would be to meet the discounted value of the liabilities. Hence, a higher discounted value, would need a higher return. Hence, increase the risk tolerance to meet that return
is the long term government bond rate always the rate used in discounting for pv of liabilities? does it include inflation? can you give an example where the rate differs from the LT gov bond rate…
Chngster, if a higher return is needed this reduce the ability to take risk. Nevertheless, the real question is… Does this request a higher return or a lower return…
discount rate is not the “spending rate”. if you increase discount rate, you decrease the present value of liabilities. you are mixing up the minimum spending rate (foundations or endowments) and discount rate (long term government bond rate).
I saw a question asking what happend if the company decide to higher the discount rate of their pension liabilities… I just don t remeber where and what was the result of it.
i think its in the book and if the company does so, the surplus will increase especially if duration of liabilities> duration of assets.
Discount rate higher, liability lower?
Higher discount rate = Lower PV of liabilities
Lower PV of liabilities = less assets required to fully fund todays liabilities
Higher return requirement to match discount rate.
Does higher return requirement mean higher or lower risk tolerance? My guess is it depends on the funded status.
^ Agree. Depends on PVA - PVL.