ThreeBearsBalancedWithText_2020
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pricing_approach
[discount_rates_problem] [main_variables] [pricing_approach]

There are two approaches, labelled “MtM” and “Off”, respectively corresponding to “mark to market” and “off market” (the latter formerly called smoothing).

MtM Assumption  The initial discount rate is now always the yield on long-term conventional gilts because I am now excluding index-linked gilts. While simplistic, it is not only simple but also not that far away from what broadly tends to be assumed. This can either be taken as it is or increased by 1% pa.

Off Assumption  For equities and bonds, the expected return is estimated as a multiple of the initial yield. Using random numbers and past experience, the multiples have been set separately for each of the 4 experiences (see below). Were I still including ILGs, I would still have chosen “yield + expected long-term inflation + 1%” (taken from ukrpi.com).

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Although these are based upon past actual experience means, we don’t actually need to use scalars (but I have done so).