Single discount rate vs multiple

[rave23]

Hi all

Can some please tell me what is the advantage and disadvantages of using a single discount rate?

Thanks

 

[Stuart Underwood]

Discount rate

Hi rave23,

Remember that a single discount rate and separate pre- and post-retirement discount rates are both approximations to a full "yield curve" approach, where every discount rate at every term is different.

With this in mind, a single discount rate has the following properties:
+ simpler
+ may be more suitable for an asset-based discount rate approach where the distinction between the different assets in is not whether the liabiltes are pre- or post-retirement
- may be a less accurate approximation to the full yield curve
- a split discount rate may be more appropriate for a bond yields plus risk premium approach where different rates could be used to reflect different appropriately matching assets pre- and post-retirement
- a single rate can be less prudent - as if split pre- and post- retirement discount rates are used (and the scheme is maturing) then more of the liability eventually is discounted at the lower post-retirement discount rate

Hope that helps!

Best wishes

Stuart

Stuart Underwood
ActEd Tutor