Dynamic Discount Rates

Introduction and objectives:

This WP follows on from a recommendation made in a paper, “Report of the target end states for defined benefit pension schemes working party” – see para 1.13.

The concept of a dynamic discount rate is covered briefly in the above paper (see paras 4.78 to 4.87) but, in essence, it’s an approach whereby the discount rate used for funding purposes moves in sympathy with the low-risk asset portfolio that is backing the liabilities. It works well in cases where the asset portfolio consists of investments with a high degree of contractual cash flows that are similar in nature and profile to the expected benefit outgo. There are, of course, other factors to consider when setting the discount rate such as risks not covered by the cashflows but the above concept is still a useful starting point.

Outputs: