All else equal, if interest rates go down then your pension liabilities (or the PV of your pension liabilities) will go up, since they have a smaller discount factor. Is this correct (I’m 85% sure, but want to check)? Also, which interest rate is normally used to discount pension liabilities? 10-year, 30-year, a discount rate found using the CAPM? Thanks.
- Yes. 2. Not sure, I don’t believe there is a standard benchmark used.
Under current accounting rules, it should be a portfolio of high quality corporate bonds that will “settle” your liabilities…while in practice this rate will vary by plan due to demographics, for simplicity you could reference Moody’s Aa index as a proxy.
the interest rate used to discount liabilities is the actuary rate…which will be given to us. if that’s not given the post above is a good proxy (AAA high quality bonds).
Yeah you don’t want to be using a floating rate necessarily every single month or quarter as the vol will be high…if you use the actuarial rate it will smooth your liabilities.
Hold on the guru is here. the accounting valuation is done annually and it uses the Moody AAA as proxy for high quality corporate bond yield for discounting. It WILL change annually. There is no such thing as ‘actuary rate’ for accounting purposes.