discount rate and projected earnings assumption

[RayJJohnsonJr]

I've been out of DB's for a while so please bare with me. A CPA client asks, "What is the DB discount rate and what can be used for a projected earnings assumpton?" Then he asks, "Isn't there a correlation between the 2?" Can anyone help me answer these questions,

Thank you in advance

[tymesup]

By "projected earnings assumption", I assume he meant salary scale.

Some folks use the building block approach to setting their actuarial assumptions. For the discount rate, you would have pieces for the real rate of return for a risk-less investment, a risk premium and the rate of inflation. For the salary scale, you would have a productivity rate and the rate of inflation.

Since the rate of inflation is in both assumptions, they are related. You might argue that the real rate of return and the productivity rate are related, as well.

Under PPA, the feds are setting the assumptions for us, to a large extent.

[SoCalActuary]

My public does not bear the thought of asking me to bare anything. But..

I suggest a different take on the question:

CPA is asking what the discount rate for FAS will be,

then follows with a question on what is the long term expected return on assets.

Generally, discount rate - tied to fixed income yields available, weighted to the expected time until payment.

Expected return on assets - tied to long term yields, weighted by asset class in the trustee's portfolio guidelines.

The two rates might be closely correlated if the portfolio guides include a significant fixed income component.

[david rigby]

I assume "projected earning assumption" refers to (something like) the FAS ROA rate, and/or the funding interest rate. They are similar, at least pre-PPA, but not necessarily identical.

Although not clear, the orginal question may be asking for the difference between a FAS discount rate and a FAS ROA rate. The best place to start is the definitions in FAS87.

[AndyH]

My reply to said CPA, at least on a Friday afternoon shortly after 10/15, would be "What's the frequency, Kenneth?"