Discount rate reasonableness?

[Janice F]

How does one determine if a discount rate used by the actuary is reasonable? Is there a reference source for acceptable discount rates? Thanks for any feedback you can provide.

[Andy the Actuary]

How does one determine if a discount rate used by the actuary is reasonable? Is there a reference source for acceptable discount rates? Thanks for any feedback you can provide.

To answer your question, please disclose:

1. Accounting or funding or lump sum determination or other purpose (top heavy or 401(a)(4) testing?

2. If funding, is Plan subject to minimum funding standards?

3. State the assumptions

There are general guidelines for accounting but no stipulated rates. Federal law prescribes the rates used for funding for plans subject to minimum funding standards. If the Plan is a private plan (as opposed, e.g., to governmental), lump sum sums are determined by the Plan subject to minimum standards.

[david rigby]

I'll assume you refer to the FAS87/106/158 discount rate. (OK, it's now ASC 715.)

A few thoughts, that you can use or ignore:

1. Note that the actuary uses the discount rate, but does not choose it. The party responsible for the discount rate is the plan sponsor who must put FAS87/106/158 disclosure items in its financial statement. For this reason, many sponsors have their auditor review (but not choose) the discount rate. Most of the auditors I deal with prefer to review the process of choosing a rate, rather than the rate itself.

2. I recommend a particular process to my clients, some of whom use it.

3. Some people think that "reasonableness" is measured by "what is everyone else doing". I'm strongly opposed to that as a definition.