Return requirement for DB plan

[MrSmart]

@johntavv

@MrSmart

@ayodayo

Is this as simple as the retirees receive inflation-adjusted pension payments and therefore the inflation assumption is embedded into discount rate?

Also, I dont know if “You do not need to know that when plan is fully funded - you DO NOT ADD INFLATION.” is accurate. Haven’t seen a mention of that in the curriculum.

People here make it seem harder than it is.

The discount rate used to find the PV of any asset/liability is a nominal discount rate. Adding inflation to it is useless.

Now if the payments were real, and the discount rate did not include inflation, then guess what, adding inflation is still useless.

So is the discount rate used to find the PV of any asset/liability always a nominal discount rate? Hence why we don’t need to add inflation to the return requirement?

Not always.

You need to either add inflation to both, or none. Using payments that grow with inflation on a real discount rate is incorrect, and the opposite is true.

But discount rates always match the cash flow nature in practice, that’s how they’re priced in real life.

[S2000magician]

Quoted interest rates are always – _ always! _ – nominal rates, unless they specifically specify otherwise.

[johntavv]

@S2000magician

Quoted interest rates are always – _ always! _ – nominal rates, unless they specifically specify otherwise.

I see. So if i see a discount rate applied to determine the PV of plan liabilities I will take it as nominal (unless stated). Thanks s2000

[lilJamieDimon]

Was a 2015 exam question as well. I did the same thing. I’m using S2000’s intuition moving fwd.