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  #31  
Old 12-19-2007, 04:39 PM
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Why don't companies just use the swap curve like they do for all their other accounting exposures? I never understood why companies ever continued to use benchmarks after the rules essentially pegged the liabilities to AA.

It sure would eliminate this insane argument. Also, if 2% of liability is immaterial, then I give up as a market analyst. To an owner of GM, that $120 million or so (forgive me as I am not up on their current asset base) is not on the books as debt because some valuation consultant didn't know how to use a swap curve, is ridiculous.
If you think GM represents the average corporate pension liability to consolidated balance sheet ratio then I agree you should give up as a market analyst.
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  #32  
Old 12-19-2007, 05:02 PM
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If you think GM represents the average corporate pension liability to consolidated balance sheet ratio then I agree you should give up as a market analyst.
Meh. It's a valid point. If he can find one easy example where this methodology wouldn't be reasonable, it makes sense that it shouldn't be rubber stamped.

Obviously there are companies where the pension plan is immaterial and 25bps isn't going to matter one way or the other.
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  #33  
Old 12-20-2007, 10:32 AM
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If you think GM represents the average corporate pension liability to consolidated balance sheet ratio then I agree you should give up as a market analyst.

You obviously don't have a client that has any analyst coverage, because you would never survive a meeting saying things like that. So given that you work on small plans, why should your opinion of what is material matter at all?

The rules are in place to provide transparency to people who read financial statements - not to overcome the academic weakness of the people preparing them. Perhaps a materiality test would suffice here, but there is no way that any of the Fortune 100 can get away with rounding 15 bps off their discount rate.

As far as benchmarks go, if plans aren't using them then what is the Citigroup Index being used for? (serious question - I've been out of the game for a while)
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We, the actuarial profession, did several things badly.

1. Pandering - we marketed ourselves as finding clever ways to give the public pension sponsors something for nothing
2. Ignored consequences - we found clever ways to allow politicians to ignore the true costs of benefit increases, like negative amortization of losses
3. Low standards of measurement - GASB had the most simple-minded of standards, and is now only going half-way to raise the standard.
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Old 12-20-2007, 11:14 AM
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The curve is being used against the payment streams of the plan.
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  #35  
Old 12-20-2007, 11:46 AM
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But the Citi curve is the benchmark (for rates), as opposed to the swap curve right? My question is why use the (rounded/delayed/approximate) Citi curve as opposed to the (pure and up-to-date) swap curve?
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We, the actuarial profession, did several things badly.

1. Pandering - we marketed ourselves as finding clever ways to give the public pension sponsors something for nothing
2. Ignored consequences - we found clever ways to allow politicians to ignore the true costs of benefit increases, like negative amortization of losses
3. Low standards of measurement - GASB had the most simple-minded of standards, and is now only going half-way to raise the standard.
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  #36  
Old 12-20-2007, 01:03 PM
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Because we like to use approximations to prepare precise answers.
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  #37  
Old 12-20-2007, 01:07 PM
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Originally Posted by WWSituation View Post
But the Citi curve is the benchmark (for rates), as opposed to the swap curve right? My question is why use the (rounded/delayed/approximate) Citi curve as opposed to the (pure and up-to-date) swap curve?
The citi curve builds in the credit spread and is more in line with what the statement actually says.
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  #38  
Old 12-20-2007, 01:34 PM
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Ah, ok - I was just completely missing your question. Yeah, what Kenshiro said.

Kenny - we use approximations to prepare approximate numbers, actuaries just like to round those approximate numbers to the 10th decimal place.
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  #39  
Old 12-20-2007, 04:31 PM
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I thought that the statement essentially pegged the liabilities to a AA rate. (I admit I'm ignorant of the specifics but I do remember the PBGC statement naming 3 AA-AAA indices off of which the Citi was one) The swap curve is based off of LIBOR which makes it a AA rate.

If the plan sponsor is doing any kind of risk management, they are more than likely doing it using the swap curve so using another rate would introduce basis. I guess I'm wondering what is incorrect about using the swap curve?

I'm mainly interested because this difference is a complication to LDI if actuaries are not amenable to using the swap curve.
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Originally Posted by Duffer View Post
We, the actuarial profession, did several things badly.

1. Pandering - we marketed ourselves as finding clever ways to give the public pension sponsors something for nothing
2. Ignored consequences - we found clever ways to allow politicians to ignore the true costs of benefit increases, like negative amortization of losses
3. Low standards of measurement - GASB had the most simple-minded of standards, and is now only going half-way to raise the standard.
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  #40  
Old 12-20-2007, 04:47 PM
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Originally Posted by WWSituation View Post
I thought that the statement essentially pegged the liabilities to a AA rate. (I admit I'm ignorant of the specifics but I do remember the PBGC statement naming 3 AA-AAA indices off of which the Citi was one) The swap curve is based off of LIBOR which makes it a AA rate.
That's probably true, and you could probably make the case that basing your discount rate on the LIBOR curve is appropriate, but that falls short of saying the citigroup curve isn't appropriate.

The swap curve will almost always be lower than a corporate curve. The swap curve is based on highly rated banks. For some reason, highly rated corporate debt has a higher yield. (different credit risk? more risky loan convenants?)

Quote:
Originally Posted by WWSituation View Post
If the plan sponsor is doing any kind of risk management, they are more than likely doing it using the swap curve so using another rate would introduce basis. I guess I'm wondering what is incorrect about using the swap curve?

I'm mainly interested because this difference is a complication to LDI if actuaries are not amenable to using the swap curve.
If you can convince the client that using a lower discount rate is in their best interest, I doubt you'd get much push-back from the actuary or auditor. It will make the client's pension plan look relatively more expensive when compared to its peers, however, so I don't think I would recommend it.

If you just want the liabilities measured at that rate for risk management, I don't think you'd have any objections.
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