In reading 33, p34, example 3, whose solution states this

"Given that both alternative debt and hedge funds have higher projected long- term returns than traditional debt and equities, respectively, the discount rate applied to LSPP’s liabilities can be increased, thereby reducing their present value."

How does this make sense? The example suggests allocating less to equities and fixed income and more to Alt Investment - which changes the discount rate of pension assets. But why does the curriculum state this also changes the discount rate of pension liabilities?

Shouldn't pension liabilities strictly be discounted by rates affecting retirement benefits payments? i.e. salary growth during active employment and inflation expectations? And have nothing to do with asset allocation?

UPDATE Nov 23, 2020

Found the answer to my own question:

reading 33, p19,

"In the United States, private and corporate DB pension plans may discount liabilities at

rates based on high- grade bond yields averaged over 25 years."

"US public DB pension plans use actuarial discount rates which, as required by the US

Governmental Accounting Standards Board (GASB), are based on the expected return

of the pension plan asset portfolio. These are typically far higher than bond rates. The

higher discount rates lower their liabilities and raise their funded status. However, this

may cause such pension plans to potentially make inadequate plan contributions and take

on excessive risk by investing heavily in equities and alternatives in hope of generating

an expected rate of return that supports the high discount rate."

US Private DBP uses Liability discount rate = high grade bond yields (avg)

US Public DBP uses Liability discount rate = expected returned on assets.

So US public DBP managers, just go 100% bitcoin, and your pension funding ratio will be over 9000! What a crazy world we live in.