{"id":2570,"date":"2014-01-15T09:17:33","date_gmt":"2014-01-15T14:17:33","guid":{"rendered":"http:\/\/pensionblog.com\/?p=1268"},"modified":"2014-01-15T09:17:33","modified_gmt":"2014-01-15T14:17:33","slug":"higher-discount-rates-will-help-2013-pension-disclosures-and-2014-expense","status":"publish","type":"post","link":"https:\/\/viaactuarial.com\/2014\/01\/15\/higher-discount-rates-will-help-2013-pension-disclosures-and-2014-expense\/","title":{"rendered":"Higher Discount Rates Will Help 2013 Pension Disclosures and 2014 Expense"},"content":{"rendered":"

The final results are in and pension plan sponsors should be pleased with final year-end discount rates – at least compared to the FY2012 rates. Using the Citigroup Pension Liability Index (CPLI) and Citigroup Pension Discount Curve (CPDC) as proxies, pension accounting discount rates are up by about 90 basis points this year.<\/p>\n

This is great news for pension plan sponsors. The higher discount rates will have a very beneficial effect on pension liabilities. This in turn will affect both the year-end funded status of the plan and also the 2014 pension expense calculation.<\/p>\n

Analysis<\/span><\/strong>
\nIn the chart below we compare the CPDC at four different measurement dates (12\/31 2010 to 2013). We also highlight the CPLI at each measurement date. The CPLI can be thought of as the average discount rate produced by the curve for an average pension plan.<\/p>\n

\"Citigroup<\/a><\/p>\n

The orange arrows in the chart highlight the trend in yield curve movement and show how rates have increased at almost all points along the spectrum since 2012. This means that pretty much all plans, even closed\/frozen plans with shorter durations, should experience the benefit of higher discount rates.<\/p>\n

Net Effect on Balance Sheet Liability<\/span><\/strong>
\nMany plans also had strong investment returns during the year. Depending on the starting funded status, the change in pension liabilities and assets can have a leveraging effect on the reported net balance sheet asset\/liability.<\/p>\n

Below is a simplified illustration for a plan that was 70% funded on 12\/31\/2012 and we assume a 10% decrease in pension liability during 2013. We then compare the funded status results under two asset scenarios: (1) Assets 5% higher than 12\/31\/2012 and (2) Assets 15% higher than 12\/31\/2012.<\/p>\n

\"12312013<\/a><\/p>\n

In both cases, the funded status of the plan improves measurably. There\u2019s also a magnified decrease in the unfunded balance sheet liability because it\u2019s such a leveraged result. This amount decreases by 45% and 68%, respectively, in the two sample scenarios.<\/p>\n

Conclusions<\/span><\/b>
\nSo, what should plan sponsors be considering over the next few months as we approach year-end? Here are a few ideas.<\/p>\n