Increase discount rate on PBO discount, increase, because, across, only

svgleeson

I want to confirm the effects of an increase in discount rate, because while I was aware of the first two below I only just came across info that the third one occurs as well.

If discount rate increases:

1) Service Cost decreases
2) Interest Cost decreases
3) Actuarial gain (which is a negative amount so decreases PBO as well)

cv4cfa

actuarial gain= (actual ROA - expected ROA)

Whereas the discount rate will not have any effect on gain/loss, PBO will either go up/down (add losses, deduct gains)

neil1234

no idea what you just said

jacksparrow

Discount rate has no effect on Actuarial gain/loss

on a diff note:
PBO includes actuarial G/L ---

Actuarial gains will reduce PBO
Actuarial losses will increase PBO

President1988

right thats what i thought too.

then i came across schweser exam 2PM, question 93, which says that an increase in discount rate causes an actuarial gain.

kickthatcfa

An actuarial gain/loss can arise from changes in the discount rate assumptions used. PBO will decrease if your discount rate increases and vice versa. Under GAAP you have to amortize the actuarial deferred gain/loss.

There are 3 inputs that can cause an actuarial gain/loss:

Changes to discount rate
Rate of compensation increase
Actual vs. Expected return on assets

SpyAli

job: increase in discount rate decreases interest cost as well (only very rarely can it increase interest cost, if the firm's pension plan is mature)

chuck: you seem to be contradicting yourself. at 6:28 you said "Discount rate has no effect on Actuarial gain/loss" and at 7:05 you said "An actuarial gain/loss can arise from changes in the discount rate assumptions used."

tikfed

hah sorry about that chuck, that may be a cue that its time to take a study break.

in any case, i think youre right (chuck).

stalkey

quick: explain why service cost decrease

benbenxiong

If you think about it, you would not have the actuarial gain unless the discount rate change has a retrospective effect.

Usual case will be that interest rate environment is changing externally, and based on that you would change it going forward (prospectively). So you would have the Interest cost impact and the service cost impact going forward, but no Actuarial gain.

Actuarial gain/loss is more likely due to compensation rate changes - which can be retrospective, esp since union negotiations may cause that to happen.

CP