why is it that within qualified defined benefit pension plans that pay lump sum benefits the LS amount has an inverse relationship to federal government’s interest rates – that is, higher rates mean lower lump sums and vice versa?

Question

I work in this industry and have been unable to get a clear answer on the WHY. I haven’t cornered one of the actuaries to explain it yet but I’m not even sure if they would ELI5. And google just mentions the inverse relationship and that’s it. I’m assuming it has to do with present value of $ and the expected mortality but I was hoping for a very simple explanation.

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Answer 1

If defined benefit had to pay out X, you need a larger principal earning a lower interest rates to hit that number. A smaller principal earning higher interest would also hit that number.