The present value of projected retirement benefits shown in a SORP is calculated using a discount rate of which rate?

The present value of projected retirement benefits shown in a SORP is calculated using a discount rate of which rate?

• A. 1% per annum
• B. 2% per annum
• C. 2.5% per annum
• D. 3% per annum

Answer: (C)

Discounting future retirement benefits uses a rate that reflects the time value of money over the projection period and the risk of those cash flows. In this SORP context, the rate specified for calculating the present value of projected retirement benefits is 2.5% per annum. This means each future benefit is discounted by (1.025)^t to bring it to present value and then summed. The rate is a standard, prudent assumption defined by the SORP for consistency across schemes and is not tied to the plan’s actual investment return. Using any of the other rates would change the calculated present value, whereas 2.5% aligns with the guidance given in this question.

Discounting future retirement benefits uses a rate that reflects the time value of money over the projection period and the risk of those cash flows. In this SORP context, the rate specified for calculating the present value of projected retirement benefits is 2.5% per annum. This means each future benefit is discounted by (1.025)^t to bring it to present value and then summed. The rate is a standard, prudent assumption defined by the SORP for consistency across schemes and is not tied to the plan’s actual investment return. Using any of the other rates would change the calculated present value, whereas 2.5% aligns with the guidance given in this question.