Discount Rate- How its Determined

Key Benefit ConceptsActuarial, OPEB

The determination of the discount rate in your OPEB valuation begins with the following question, “Do you pre-fund your OPEB plan through an irrevocable trust?” If the answer is yes, there is a little more that goes into setting the discount rate. If not, GASB 75 makes it very clear how to go about it. For those who do not fund their OPEB through a trust, the discount rate should be a single rate that reflects a yield or index rate for 20-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher.

For those who do use a trust, the discount rate should be a single rate that reflects the long-term expected rate of return on the trust’s investments. If the trust funds multiple benefit plans such as also a Supplemental Pension plan, the discount rate should only be based on the monies earmarked for the OPEB plan. Many employers’ investments are very conservative, whether it’s fixed income, cash or cash-equivalents. In these situations, it isn’t practical to set the discount rate at 0.20%, 0.10%, etc. As a result, KBC has consistently determined the discount rate for clients with investments such as this as if they were not using a trust. Further, should it be determined that your trust won’t remain solvent to cover all projected future benefit payments on behalf of current plan members, a single “blended” discount rate should be calculated.

Also, it is worth pointing out that regardless of your current funding situation, the assumed discount rate is determined as of the measurement date.