Where will the world be re 6/30 FAS158 discount rate?

[tuni88]

Based on a non-random, too-small sample of 16 corporate sponsors of DB pension plans with fiscal years ending 12/31, about 1/2 used 5.75% as the end of year disclosure discount rate for their pension plans and about half used 6%. I know this is really, really hard for you actuaries, but I conclude from this that the world at large was disclosing at more or less 5.875% on 12/31/06.

Now transport yourself a couple months into the future when the disclosures as of 6/30/07 are being made public. What do you suppose the 5.875% will have moved to?

I could offer a prize to be awarded this fall to the responder who comes closest. But, nah.

[david rigby]

At the end of December, Moody's Aa rate was 5.72%. At the end of June, it was 6.10%. Can we assume that market rates are 40-50 basis points higher? Maybe. Although that may not be the best technique to determine a discount rate, it can't hurt to include it in the discussion.

Of course, you can find your own discount rate by doing some cash flow matching; not necessarily easily done, and possibly not worth the effort.

[tuni88]

I knew the question would be too difficult.

[Blinky the 3-eyed Fish]

Your question is poor and your comment is rude.

[tuni88]

Really? Asking how the consensus or average disclosure rate will change after 6 months is poor? You don't have a guestimate?

[Guest Doug Goelz]

Really? Asking how the consensus or average disclosure rate will change after 6 months is poor? You don't have a guestimate?

Up until a couple of years ago, most companies simply referenced the Moody’s Aa long-term bond index. It was also common practice to round the actual annualized rate to the nearest 25 basis point multiple. For example, the annualized Moody’s Aa long-term corporate bond yield average of 6.19% at June 30, 2007 would round to 6.25%. However, there has been a shift away from simply referencing a benchmark index as the sole basis for selecting a discount rate. Plan sponsors should now be considering the benefit obligation cash flows to determine the appropriate discount rate. Please see the attached document I put together.

In general, I would expect to see discount rates being close to 6.25% for June 30, 2007 measurements.

Updated:

Sorry folks, but I posted the wrong Citigroup rate on the file I originally sent. Attached is an update. My apologies for not being more careful.

FAS_87_Discount_Rate_Setting_Exhibit___6_30_2007.pdf

[Guest Doug Goelz]

Sorry folks, but I posted the wrong Citigroup rate on the file I originally sent. Attached is an update. My apologies for not being more careful.

[tuni88]

Doug,

Thank you for your straight answer that you think 6.25% will be the likely prevailing discount rate at 6/30. (aside to Blinky - take a lesson here.)

Follow-up question: You attached some rate indexes at 6/30/06 and 6/30/07. What were the values at 12/31/06 and is there a web site where one could find them all in one place?

tuni88

[david rigby]

(aside to Blinky - take a lesson here.)

Aside to tuni88: you may have missed the point. There is no single correct rate, especially because there are so many different opinions about rounding. There may not even be a correct range. Whether or not 6.25% will be "prevailing" is something we will know only after we see public filings or surveys. Please note Doug's correct comment

However, there has been a shift away from simply referencing a benchmark index as the sole basis for selecting a discount rate. Plan sponsors should now be considering the benefit obligation cash flows to determine the appropriate discount rate.

and the significance of setting the rate that is most apppropriate for each plan. Each plan's duration and cash flows is the correct starting point, not an external market index.

BTW, I post Moody's rates here each month.

http://benefitslink.com/boards/index.php?showtopic=27329

[SoCalActuary]

So tuni88 is looking for the one-handed actuary, who never says "on the other hand"....

Thoughtful responses are not needed here, apparently, so I'll enter my guess in the lottery for the best number as 6.21%. Why? I like the sound of it.

[tuni88]

pax

Go back to the premise of my original question. I'm not asking for a theoretical actuarial response. I'm looking for guesses as to what I'll actually find when I do the same unscientific 10-minute study this fall for the handful of companies that I own who sponsor a DB pension plan.

If it's too unactuarial for you, then pretend you take a sample of several hundred public companies. What do you guess will be the mode for the discount rate at 6/30/07 after the dust has settled?

It seems to me the answer will be either 6% or 6.25%. Maybe it will be bi-modal.

tuni88

[david rigby]

Alas, you seem to have missed the point, again.

1. The "numbers" suggested by Doug and SoCal are reasonable guesses.

2. They are guesses, but your original post asks that it be compared to what? A "right" answer?

3. The universe of 6/30 measurement dates is much less than at 12/31.

4. It is theoretically incorrect to determine a discount rate based solely on reference to one or more indexes, or based on comparison to whatever others are doing.

But you want a prediction. Here's mine: auditors will put increasing emphasis on the objective criteria and mechanism for choosing a discount rate (or salary scale, etc) and will be signing off on the process rather than the result. More of this in 2006 than in 2005; I expect to see much more at the end of 2007.

[tuni88]

Alas, you seem to have missed the point, again.

1. The "numbers" suggested by Doug and SoCal are reasonable guesses.

2. They are guesses, but your original post asks that it be compared to what? A "right" answer?

3. The universe of 6/30 measurement dates is much less than at 12/31.

4. It is theoretically incorrect to determine a discount rate based solely on reference to one or more indexes, or based on comparison to whatever others are doing.

But you want a prediction. Here's mine: auditors will put increasing emphasis on the objective criteria and mechanism for choosing a discount rate (or salary scale, etc) and will be signing off on the process rather than the result. More of this in 2006 than in 2005; I expect to see much more at the end of 2007.

Huh? Did you read the original post? And whatever makes you think I'm trying to determine a discount rate? I don't have the slightest interest in how its done, just want a prediction of what it'll actually be when all the "theoretizing" is done. It's hard, I know. What do you think it'll be?

[david rigby]

What do you think it'll be?

Alas...

I already told you.

[Mike Preston]

Did you hear the one about the client that walked into a bar? ..........

[AndyH]

Sounds like tuni is looking for an Italian actuary.

Actuaries can tell you how long you are expected to live. Italian actuaries can also tell you where and in what manner you will die.

[Belgarath]

6.66%.