interest assumption

[tuni88]

An unscientific sampling of the interest rate used for pension accounting as of 12/31/11 shows this for various companies:

AT+T 5.30%

Wells Fargo 5.25%

J&J 5.22%

3M 4.15%

GE 4.09%

Chevron 3.80%

Are these companies living in parallel but different worlds on opposite sides of the sun? Or what?

[SoCalActuary]

Let's add the potential for manipulation of equity in the plan sponsor's books.

Banks in particular need to show a healthy balance sheet.

Oil companies need to hide profits.

But the issue could also reflect timing of the disclosure, decisions of the investment policy, and conservatism of the boards.

It could also reflect the potential of expected annuity payments vs lump sums, based on different expected payout schedules.

It could even reflect a Financial Economics view of the sponsor's credit ratings, where weak balance sheets justify higher risk.

Still, you present an interesting point.

Looks like a reason to buy the stock of the plans with the low interest rate and short-sell those with high rates.

[StormShadow]

It is probably a function of their asset allocation. When I worked on large plans, the auditors wanted to see all kinds of support for how the clients chose their interest rates. However, they were much more demanding when using a higher interest rate, so perhaps they don't care as much using a lower rate.

[david rigby]

Just a few comments:

- Taking into account cash-flow matching and expected benefit payments, can a discount rate be too conservative?

- Does an auditor have any responsibility to point out a discount rate that is "too low"? (they will certainly point out the opposite)?