Which interest rate is commonly used for pension valuations?

In pension valuations, the appropriate interest rate used to discount future cash flows is typically aligned with long-term fixed income securities, which reflects the time value of money over the duration until the pension payments are made. The 20-year Treasury bond rates are commonly referenced due to their duration, which provides a more accurate assessment of the long-term obligations associated with pensions.

Using the 20-year Treasury rate allows actuaries and financial analysts to estimate the present value of future pension liabilities effectively since it closely matches the duration of many pension plans' obligations. This long-term perspective helps ensure that the valuation is realistic and aligns with the investment strategy that pension funds might pursue.

The other options, such as the 10-year and 30-year Treasury bond rates, may apply in different contexts, but they either do not align closely enough to typical pension durations or are used for short-term vs. long-term obligations. The prime interest rate, on the other hand, is associated with banks' lending rates and is not typically suitable for discounting pension liabilities. Thus, the reliance on the 20-year Treasury bond rate for pension valuations is well-founded in financial practice.