Hello all Please can someone help me, I'm going round in circles trying to figure this out. An explanation from first principles would really help! How do you apply post retirement basis switches? I've seen people apply 1.15^(change in yield) but where did the 1.15 come from?! Is it to do with the mortality table or the term to retirement? What about for current pensioners? Confused! Ta
All it's saying is that for every 1% you change the net discount rate of an annuity for actives or deferred, the value of the annuity changes by 15%. There's no mathematical deduction, it's based on empirical evidence from current mortality tables that are typically used. For pensioners you would probably use c. 12% as on average they may be over NRA hence payments for a shorter period.
Thanks for your reply. I thought it was deduced based on the duration / average term until retirement and mathematically deduced. So you would just "guess" to use 1.15 for actives/deferreds - not look at their duration? Where would you find the evidence? Is it written anywhere or is it just from experience? Thank you
Yes, technically it is the post retirement duration (nothing to do with pre-retirement, don't get confused) and if you got a life table I'm sure you could work it out, but that's not what a rule of thumb is trying to achieve - its saying 'broadly speaking' if you change the net discount rate by 1% etc etc
