← Legal Glossary
Discount Rate
Definition
An interest rate used to calculate the present value of future payments. In pension contexts, it represents the expected rate of return on the plan's investments. A lower discount rate increases the calculated present value of future pension obligations (and thus withdrawal liability), because it assumes the plan's investments will earn less, requiring more money today to fund the same future payments.
Examples
- •Reducing the discount rate from 7.5% to 6.5% roughly tripled the petitioners' withdrawal liability because of the compounding effect of interest over the 20-40 year period of future pension payments.