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Defined Benefit Discount rate

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › Defined Benefit Discount rate

  • This topic has 2 replies, 2 voices, and was last updated 6 years ago by P2-D2.
Viewing 3 posts - 1 through 3 (of 3 total)
  • Author
    Posts
  • August 6, 2018 at 8:57 pm #466495
    llkkjj
    Participant
    • Topics: 28
    • Replies: 40
    • ☆☆

    Dear Sir,

    I was reading the annual report of sainsburys on there defined benefit plan and read

    “The £589 million decrease in the deficit from
    11 March 2017 was driven by a rise in the discount rate from 2.70 per cent to
    2.80 per cent, and updates to future mortality assumptions. The discount
    rate has been increased this year to use a revised approach that the Group
    believes better reflects expected yields on high quality corporate bonds
    over the duration of the Group’s pension schemes.”

    How would an increase in discount rate decrease a deficit? isn’t both Assets and liabilities are both affected by the same discount rate so the net effect would be zero?

    August 6, 2018 at 10:11 pm #466520
    llkkjj
    Participant
    • Topics: 28
    • Replies: 40
    • ☆☆

    i think i got it , since the discount rate used for the obligation increased, the obligation in PV terms will be smaller , this does not effect asset as its FV? So the net effect would be a reduction in liability?

    August 7, 2018 at 7:30 pm #466643
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    Good to see you keeping up to date with current developments in the real world. Yes, your correct in your assessment and you might also want to look at the recent issue with regards to actuarial valuations and BT.

    Thanks

  • Author
    Posts
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