Professor Emeriti Connie Smith and Stuart Landon have recently had a paper published by the C.D. Howe Institute entitled, "Managing Uncertainty: The Search for a Golden Discount-Rate Rule for Defined-Benefit Pensions".
The paper looks at the discount rate - the interest rate pension plan sponsors use to determine the value of assets they must set aside today to pay for promised benefits in the future. If the rate is too high, the assets are too meagre, and vice versa. Dr. Smith and Dr. Landon examine whether there is an optimum discount rate rule that strikes the right balance. This is important because,as pension payouts are often far in the future, the choice of discount rate rule can have a dramatic effect on the value of a pension plan's liabilities and,therefore, the assets needed to meet plan obligations.
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