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Home Value Investing Pension Fund – Discount Rates

Pension Fund – Discount Rates
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10:31 am
October 13, 2011


Jae Jun

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posts 1464
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a discussion on pension funds is always in the accounting books and definitely something to consider. I didn't know companies were using such ridiculously high discount rates. I haven't come across any pension funds from the companies I analyze but 8% is definitely much too high.

9:37 am
October 12, 2011


somrh

Member

posts 336
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Not many companies still have pension funds but some still do. The interesting thing to look at is their discount rates. If the discount rate chosen is high, then the company may not be allocating sufficient funds to cover their future payouts under the pension plan. For companies with a good sized pension plan, this can have a material effect on the business.

Check out this recent article discussing the future performance of pension funds:

Pimco's Prediction For Pension Plans: "Pain"

The reason why companies will do this is due to the fact that it will lower the expense associated with funds required to be allocated. If the company expects that their pension funds will perform well, they require less money to be set aside. This lowers the expense and increases earnings. See here:

Adjusting Pension Assumption to Manipulating Earnings

So what discount rates have you observed? I've seen as high as 8% which I find extremely optimistic for an environment in which interest rates are low and stocks are overpriced.
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