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Question: What Discount Rate (Interest Rate) Do You Use?
Answer: Each month, we update the interest rate, based on the then-current rates for 20-year U.S. Treasury securities. You may enter a different interest rate by clicking "more info" and scrolling down to the entry for the interest rate.
With respect to a discount rate, all you are looking for is a safe rate of return, by which to discount our expected values of pension payments.
A current 20-year Treasury Bill rate reflects that.
Some analysts use other rates, such as the so-called "PBGC" or "GATT" rates.
These rates have become customary because they were prescribed by one statute or another, ignoring the fact that the statutes themselves were not relevant to the valuation of individuals' pensions in a divorce context.
With respect to the Pension Benefit Buarantee Corporation (PBGC), that governmental entity has a mission of valuing plans in such a way that they are sure there will be sufficient funds to pay the obligation.
As a result, PBGC valuations tend to be higher than the actuarial value.
This translates into their using interest rates that are lower than that which is appropriate actuarially.
There is no reason to use those rates or any rate other than a 20-year Treasury Bill rate.
An argument could be made for a 30-year Treasury Bill rate, but that rate typically will be pretty similar to that of a 20-year Treasury Bill rate.
The 20-year Treasury Bill rate is updated monthly. We do not go out and grab the very latest number from the Web each time you start a pension valuation. However, you may get the latest number, if you wish. The rate you want is labeled "Treasury Constant Maturities -- 20 year."
One could also argue that the rate of return used should be higher than the 20 year treasury bill rate, on the theory that the recipient could earn a higher rate than that if the money were prudently invested.
This is true, but once you depart from the Treasury Bill rate, you no longer have a "perfectly safe" investment, which in theory matches the safety of the payment of the defined-benefit pension.
If you believe that the defined-benefit pension had a likelihood of not being paid entirely, one approach would be simply to apply a small discount to the result of the pension calculation. For example, you could argue that you would take the calculated pension value and take 95% of that as the pension valuation, to discount for probability of payments not being made.
Once an interest rate is entered for a particular pension, the software does not automatically update it. This is to prevent numbers from shifting without any human intervention, which would be upsetting to people.
If you are seeing a rate in your software that is dramatically different than the current 20-year Treasury Bill rate, either you are not running the current version of the software, or the pension you are looking at was created in an earlier version, and the interest rate has not been changed.
If you wish to update your software, start Family Law Software and click Files & Settings > Update Software > Update.
Or, click here: