The UK’s National Association of Pension Funds has suggested that pension liabilities should be discounted at a “risk free” rate derived from interest-rate swaps.
The NAPF has put forward a paper proposing that liabilities should be discounted at rate derived from interest rate swaps - rather than the current method using AA corporate bond rates.
“This would have the added benefit of better matching of scheme liabilities compared with current practices,” the association says. “The disclosure in the notes to accounts of the projected liability would also include the impact on the liability if future investment returns are above the risk free rate in line with those assumed for the investment policy of the scheme.”
NAPF chief executive Christine Farnish says: “We believe the approach we suggest has a number of advantages over the current standard, while still fitting within the IASB’s framework.”