Discount Rates, Defined Benefit Pension Schemes, And Their Sponsors

Written as a contribution to the Long Finance Meta-Commerce programme, this paper examines the way that discount rates are used for the evaluation and management of pension schemes.

The authors describe the role and function of a discount rate, and critique the methods presently in use for calculating discount rate determination, including those contained in the Occupational Pension Schemes (Scheme Funding) Regulations 2005 (OPS (SF) 2005). They then go on to propose a method of discount rate determination which could be used for establishing the accrued value of the liabilities of the sponsoring employer (the Contractual Accrual Rate (CAR)) which has particular merits for the management of Collective Defined Contribution schemes. The paper concludes with discussion of Collective Defined Contribution schemes, followed by consideration of some practicalities for the introduction of the CAR.