Discount Rates and CPI Assumptions for Accounting Valuation Purposes

The Treasury publishes here a table of risk-free discount rates and consumer price index (CPI) assumptions that must be used in certain accounting valuations for the purpose of preparing the Financial Statements of the Government of New Zealand.

This table of rates applies to all Government reporting entities submitting valuations to Treasury for:

• valuing insurance claims liabilities under PBE IFRS 4 Insurance Contracts
• valuing employee benefits such as pension obligations, long service leave and retiring leave under PBE IPSAS 25 Employee Benefits, and
• building a risk-adjusted discount rate for valuing student loans.

These rates may be applied to other valuations where a risk-free discount rate or CPI assumption is used. In these cases the rates may either be used unadjusted, or as a building block to calculate another assumption at your discretion.

In addition to the table, the Treasury has published the associated Methodology which comprises seven papers (see below); the original methodology dated July 2010 and six subsequent papers dated May 2012, June 2013, December 2015, July 2019, July 2020 and June 2021. The December 2015 paper documents a change in the way the short-term CPI assumption is determined under the Methodology. The July 2019 review led to a reduction of the long term nominal rate to 4.30% (from 4.75%) and a change in the way the short to medium CPI assumption is determined. In June 2021, a limited scope review concluded that the Methodology continues to be fit for purpose following the impacts of COVID-19 on the markets and economy.  For further details refer to the associated Methodology section below.

The risk-free discount rate methodology uses at its starting point the market yield curve of New Zealand Government Bonds as the most appropriate proxy for the return on a very safe asset.

The Treasury will publish here risk-free discount rates as at 30 June, 30 September, 31 December, 31 January and 31 May. These rates will be published within one week of the "as at" date.

Tables of Risk-free Discount Rates and CPI Assumptions at 30 September 2021 for Accounting Valuation Purposes

The following table shows the risk-free rates to be used for certain accounting valuations as at 30 September 2021. Note that a history of these rates, starting with the 30 June 2010 rates, is available in the Excel spreadsheets below.

The following table shows the CPI assumption rates to be used for certain accounting valuations as at 30 September 2021.

Using the Treasury Risk-free Discount Rates

Valuation models will use either forward or spot rates. Both of these rates have been provided.

Ideally, forward rates should be used for the accounting valuations. However, the ability to use forward rates will be dependent on the type of valuation programme or model used. The programme or model must be able to cope with different discount rates for each year in order to use forward rates.

If the programme or model only requires a single discount rate then select the spot rate that matches the duration of cash flows. For example, if the duration of cash flows is eight years, and the model requires a single rate, select the Year 8 spot rate from the table.

The annual forward and spot rates provided are to match annual cash flows from the "as at" date the rates are published. For example the 1 year rate published at 30 September 2021 is the risk-free rate to match the cash flow for the period 1 October 2021 to 30 September 2022.

Auditor Confirmation at 30 June 2021

The Office of the Auditor-General considers the table of risk-free discount rates and CPI assumptions as at 30 June 2021 have been determined in accordance with the associated methodology document (The Treasury Risk-free Discount Rates and CPI: Assumptions for Accounting and Valuation Purposes - July 2019). The rates and CPI assumptions are appropriate to use in:

• valuing insurance claims liabilities under PBE IFRS 4 Insurance Contracts
• valuing employee benefits such as pension obligations, long service leave, and retiring leave under PBE IPSAS 39 Employee Benefits, and
• building a risk-adjusted discount rate to value student loans.