Definition
The Discount Rate is the interest rate used to discount future cash flows back to their present value. It reflects the time value of money, expected inflation, and the opportunity cost of alternative investments.
Actuarial Formula
PV = FV / (1 + r)^n
Why Discount Rates Move Pension Values Inversely
As interest and discount rates increase, the present value of future fixed pension payouts decreases. Conversely, when discount rates decline, pension lump-sum equivalents rise significantly.