FAS Discount Rate - What is reasonable?

[John314]

I am having a debate with some other actuaries about what would be considered a reasonable discount rate for accounting purposes. If we use a strict yield curve matching approach based on FTSE above median curve, we are getting an effective rate of roughly 3.25%. Client wants to use 4.00%. They used 4.50% last year and rates have dropped about 100 bps. My understanding is that for accounting purposes, the assumptions belong to the client. I know the rate is subject to auditor approval, client approval, etc. but I am interested in the actuary's requirement to assess the rate. ASOP 27 requires that for assumptions set by another party, the actuary must state whether or not the prescribed assumption significantly conflicts with what, in the actuary's professional judgement, would be reasonable for the purpose of the measurement. 

Reasonable for one actuary may be very different from another. So what leeway do we have in determining what is reasonable? What items can/should be considered (for example, historical market bond rates relative to current? Impact on plan results? Impact on overall company results? Whether the company is publicly traded or not? Discount rate relative to other plans? etc.)

[Effen]

Sounds like you have a good handle on it.  I have no issues with anything you said.  

Keep in mind that even though the numbers may not be significant to a small closely held company swimming in cash, if/when that company is sold, they may become very important, so you want to be able to defend whatever you use.  Keep in mind that outsiders may read your disclosures and you have an obligation not to mislead them.

Also, take a look at the new exposure draft of ASOP 4 released today.  

In your specific example, we know the curve dropped about 100bps during 2019.  If 4.50% was ok at 12/31/18, I would be looking for something less than 3.50% as of 12/31/19.  Not sure how you could reasonably justify 4.0%.  You are allowed to use 4.0%, but need to state that you don't think it is reasonable.  That may be ok, if the numbers really don't matter.  If they argue about putting in the disclaimer, than you can counter with, "well, i guess these numbers do matter to someone".  

Also, don't forget about all the other assumptions.  Is your mortality assumption reasonable and does it include improvement?

[david rigby]

Ditto to all of Effen's comments.  However, it's very important to have this discussison with the auditor.  For example, if you think a reasonable rate should be X%, and the plan sponsor wants a higher rate, it's possible the auditor will express an opinion that helps your argument.