Discount rate development for ASC 715

[ndj2377]

I have a small NQ plan (10 actives) that assumes 100% lump sums. The rate used for lump sums varies month-to-month. In prior years, the discount rate for fiscal year-end has been modeled using the assumed lump sum payouts. However, the plan has a new auditor this year and we are getting push-back on the development of our rate. Since the lump sum rates is not a constant, they believe the discount rate should be developed assuming annuity payments - this would be for the discount rate only. Plan liability would be valued using the assumed LS payments and this discount rate. The auditor made it seem as though this is the method that most pension actuaries use.

The number of plans that our office has exposure to that assume lump sums is pretty limited and the few plans we do have do not use the method suggested by this auditor. Has anyone developed the discount rate using this method and what was the reasoning behind it? I would be interested to hear some other opinions on this.

Thanks.

[Effen]

If you had a plan that uses a 30-yr Treasury rate for lump sums, and you assumed 100% of the population take the lump sum, I would probably determine the accounting liability with two interest assumptions. First being the assumed 30yr rate at the time of the assumed distribution (probably the current rate), and second, a discount rate used to discount the assumed lump sum to today.

The discount rate should be based on the expected cash flow, so you should plot the expected lump payments on the current yield curve to determine the effective rate.

I agree with the auditor that it should be two different rates, but I don't think I would ignore the lump sum assumption and use the annuity payments. Ignoring the lump sum payments in your expected cash flow could produce a significantly different (most likely higher) discount rate. With assumed lump sum payments, your duration, and discount rate, will be lower.

[david rigby]

...the plan has a new auditor this year and we are getting push-back on the development of our rate.

Who is "we"? If you are the actuary, it's not your role to determine the discount rate.

BTW, I agree with Effen's comments above.