Reference no: EM133254214

In general, how can an employer choose an approiate discount rate for its pension plan? What information could an employer use in choosing a discount rate?

An employer can choose an appropriate rate for a pension plan by looking at the rates of the returns on highly qualified fixed-income investments that have a cash flow that matches the timing and the sum of the anticipated benefits payments. The main reason for choosing the assumed discount rates is to measure a single amount if it is invested into a high-quality portfolio debt instrument. This would give the employer the relevant future cash flow to disburse the pension benefits when it is due. Additionally, the information the employer can use in choosing a discount rate is that the rate should be based on a superior corporate bonds yield. However, this premium bond should be yield calculated on a plan measurement date and not on an average yield basis. Because many of the pension plan sponsors will define a discount rate selection that is consistent on a yearly basis. Also, the employer needs to know how the companies decide on the interest rate they need to apply to the pension liability, and the disclosure of the rates used in measuring the benefit amounts.

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