# What is a pension discount rate?

## What is a pension discount rate?

The discount rate is the long-term interest rate used to fund future pension benefits. The discount rate is also known as the assumed rate of return because it’s what CalPERS expects its investments to earn during the fiscal year.

How is the discount rate for pension determined?

The discount rate is determined by estimating expected rates of return, from LAPP investments over the long term, and it includes a cushion for adverse deviation, known as margin. Every time we decrease the discount rate it drives up the value of pension benefits and increases current service costs.

### Which IFRS standards mandate the use of discount rates?

Standards that include requirements in relation to discount rates include: IAS 19, Employee Benefits (2011) (where discount rates are used to discount post-employment benefit obligations) IAS 36, Impairment of Assets (where discount rates are used to determine the recoverable amount / value in use)

How do you explain discount rate?

The discount rate is the interest rate charged to commercial banks and other financial institutions for short-term loans they take from the Federal Reserve Bank. The discount rate refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.

## Why do discount rates matter?

Discounted Rate of Return Also known as the cost of capital or required rate of return, it estimates current value of an investment or business based on its expected future cash flow. The discount rate allows investors and other to consider risk in an investment and set a benchmark for future investments.

How do you discount a payment?

Discounting Single Payment A single payment is discounted using the formula: PV = Payment / (1 + Discount)^Periods As an example, the first year’s return of \$30,000 can be discounted by a 3 percent rate of inflation.

### How are pension liabilities discounted in IFRS 19?

IFRS requires to discount the projected outflows with a single “high-grade corporate bond rate”. In practice, most companies use the yields of available, long term AA rated corporate bonds. Discounting with a single yield however is only a proxy and works best for “bullet maturity” cash flows.

How is the discount rate for IFRS determined?

The rate is determined using the yield curve for zero-coupon euro interest swaps increased by an additional spread.

## What is the current discount rate for pension?

Effective May 31, 2021 the discount rate for pension obligations according to IFRS/US-GAAP is 1.05 % p. a. for a typical mixed portfolio consisting of members entitled to future benefits and retirees.

How does inflation affect the value of IFRS liabilities?

So slight changes in parameters, especially for inflation and discount rates will have a large effect on the value of the liability. Discount rates – technical aspects & Yield curves IFRS requires to discount the projected outflows with a single “high-grade corporate bond rate”.