Discount Rate Regulation for Canadian Private Defined Benefit Pension Plans

Abstract

Due to the scarcity of the long-term market instruments, the valuation of private defined-benefit (DB) pension liabilities requires an extrapolation of the yield curve. In Canada, corporate yields are adopted to discount the private DB pension liabilities, but the issue on how to extrapolate the yield curve beyond the market liquid point has not been clearly addressed in the regulatory guidance. This paper introduces a macroeconomic extrapolation method called "the Canadian ultimate forward rate" to complete the yield curve. The new method effectively reduces the valuation volatility for it is robust against interpolation models and instantaneous market distortions.