I was doing my first read of pension and I noticed the following There are two rates One which is the rate you expect to earn on your assets And another which you use to discount your liabilities That does not make sense to me, should not those two rates be the same? Here is what I am thinking: If my only asset is a $100 worth of ten year bonds that I expect to pay me 10% per year Assume my liabilities are $10 per year for 9 years, and $110 in the tenth year. If I use a rate of 9% to discount my liabilities I would get a PV of $106.41 Thus my funded status would be 100-106.41=-6.41 making it underfunded But is it underfunded in reality? My cash-in perfectly matches with my cash-out. I am thinking it might have to do with the risk of the bond, and the fact that the coupon and principle payments are more risky than the payment that we must make for sure. Can someone elaborate please?

they are not the same – bcos they are two different beasts altogether. your pension assets - are what you are investing for the pension benefeciaries in a DB Plan - the portfolio of assets. (which you hope will be enough so you do not have to make additional contributions). the liabilities are because you have agreed to make a payment in the future - the PBO/DBO which has been calculated based on the various actuarial factors assumed. You would hope the rates are same – but in reality they are different.

Besides what CP said… the expected rate of return is based on what your portfolio is invested in and the risk/returns components that matches your beneficiaries. I see the discount rate more as the real value of money eaten by time in the market outside of your portfolio so they both don’t have to be the same rates.

totally unrelated - I have a strong inkling that this june they would ask pension quite a lot