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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.) -
1/1/14 Pension Expense calculated using a 4.5% discount rate. Settlement threshold based on 1/1/14 Pension Expense is $1.0M. Lump Sum of $1.2M paid effective 6/1. Plan sponsor performs settlement accounting as of 6/1 rather than end of year. As part of settlement accounting, obligations are re-measured at a 4.00% discount rate. A few questions: Is pension expense re-measured as of 6/1/14 at 4.00%? Is the resulting total year Pension Expense a combination of 5/12 of the Pension Expense determined at beginning of year at 4.50% plus 7/12 of the Pension Expense determined at 6/1/14 at 4.00%? After the settlement accounting, does every subsequent lump sum trigger settlement accounting (because the threshold for the year has been crossed) or is the slate wiped clean and the plan sponsor starts building anew toward meeting a new threshold and a second settlement accounting for the year is performed only if subsequent lump sums exceed the new threshold? What is the new threshold? Is it based on the Service Cost and Interest Cost at 4.00%? And is it full year amounts or pro-rated amounts for 7/12 of the year? Thanks in advance for all responses.