“If the liability cash flows can be hedged perfectly by a set of market priced assets, the discount rate can be determined by reference to the discount rate for the assets.” Session 8, Reading 17 Section 3.1.
This got me thinking about one of my old firms. They utilized the goals-based wealth modeling methodology, which included a funded status. They discounted both the expected liabilities (aka goals) and their investable assets by the risk-free rate. Can someone explain to me why the assets should be discounted at the risk-free rate? That seemed inappropriate to me. I could see why the liabilities/goals should be, but not the assets. My fear is that they were inflating the funded status.
To clarify, the investable asset set was a hypothetical portfolio constructed by our firm, but not a basket that could perfectly hedge the goal cash flow liability.