Discount Rate Regulation for Canadian Private Defined Benefit Pension Plans

Abstract

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