For example, if an employers business is in decline and the effect of that decline is reflected in the turnover assumption, it may be appropriate to reflect a change in the retirement assumption, and it may also be appropriate to reflect a change in the compensation increase assumption. So it will never be reduced beyond the bottom of the range. Considering, quantifying, and documenting any other adjustments to the bond index yield. The investment return assumption differs from the discount rate because of the effective cost of providing potential future ad hoc postretirement benefit increases, or gain-sharing. In the public plan arena, many entities perform assumption reviews every few years, and these reviews may or may not lead to assumption adjustments. Measurements of defined benefit pension plan obligations include calculations such as funding valuations or other assignment of plan costs to time periods, liability measurements or other actuarial present value calculations, and cash flow projections or other estimates of the magnitude of future plan obligations. The Actuarial Standards Board (ASB) sets standards for appropriate actuarial practice in the United States through the development and promulgation of Actuarial Standards of Practice (ASOPs). The actuary should not assume that superior or inferior returns will be achieved, net of investment expenses, from an active investment management strategy compared to a passive investment management strategy unless the actuary believes, based on relevant supporting data, that such superior or inferior returns represent a reasonable expectation over the measurement period. Therefore, the substantive plan approach (see. All rights reserved. All ASOPs Home Selection of Economic Assumptions for Measuring Pension Obligations, PDF Version: Download Here Calculate. The investment return assumption, which includes gain-sharing, is currently 7.60%. 27, Selection of Economic Assumptions for Measuring Pension Obligations. For each year in which the actual rate of investment return exceeds the target rate of return, the Georgia ERS will reduce its investment return assumption by 0.1% (10 basis points) until a target rate of return assumption of 7.0% is reached.. Projected value. Under this approach, the percentage of total plan assets of each component of the plan asset mix is multiplied by the expected asset return for that component. If the actuary is using an approach that treats inflation as an explicit component of other economic assumptions or as an independent assumption, the actuary should follow the general process set forth in section 3.3 to select an inflation assumption. Interest rate assumption--Suspension of new supplemental pension contracts--No right to particular price. As in the single-employer situation, the actuary may have discretion over other economic assumptions used to measure obligations for plans other than private single-employer plans. b. any such assumption that the actuary is unable to assess for reasonableness for the purpose of the measurement (section 3.14). Nonetheless, such a change should be accompanied by a sound rationale in support of the change. For example, the actuary may provide advice on selecting economic assumptions under US GAAP or Governmental Accounting Standards even though another party is ultimately responsible for selecting these assumptions. Using solely historical returns as an approximation of the rate of return may not produce an appropriate rate, particularly if the market has moved significantly in one direction in recent years. 3rd ed. However, it may not be appropriate to assume that future contracts will provide the same level of compensation changes as the current or recent contracts. Other economic assumptions may include the following: Social Security benefits are based on an individuals covered earnings, the OASDI contribution and benefit base, and changes in the cost of living. For plans other than private single-employer plans (for example, church plans, multiemployer plans, public plans), the discount rate for current-year funding requirements may or may not be prescribed by other entities. endobj Draft revisions of ASOP Nos. It is not intended to be an exhaustive list. In February 2017 the CalPERS Board adopted a risk mitigation policy, effective beginning FY 2021, that calls for a reduction in the systems investment return assumption commensurate with the pension fund achieving a specified level of investment return. . Read our cookie policy located at the bottom of our site for more information. Examples of multiple compensation increase assumptions include the following: a. b. bond yield rates as of the Measurement Date. ) &L%3 %FRY=s6XhrLj-IL+(\Y`?YV}_rFhq|~H,Cu`13sb%K_|4dy>K++_l`}^N&+ D#Sz a. U.S. Bureau of the Census. The expected long-term rate of return on plan assets should also reflect the long-term earnings expectations on contributions to the plan expected to be received during the current year. Companies must also disclose other economic assumptions: the expected rate of return on plan assets, the expected rate of salary increases, National Association of State Retirement Administrators. 6 0 obj c. Market-Consistent MeasurementsAn actuary making a market-consistent measurement may use a discount rate implicit in the price at which benefits that are expected to be paid in the future would trade in an open market between a knowledgeable seller and a knowledgeable buyer. These assumptions include the discount rate and estimate of future salary and benefits levels. The actuary should select economic assumptions that reflect the actuarys knowledge as of the measurement date. Chicago, IL: Ibbotson Associates. The average investment return rate assumption for U.S. public pension funds has fallen below 7.0%, to its lowest level in more than 40 years, according to the National Association of State Retirement Administrators. Additional changes were made to improve readability, clarity, or consistency within this ASOP and ASOP No. The expected rate of return on assets is the long-term expectation of the annual earnings rate on the assets of the pension fund. %PDF-1.7 % e. U.S. Social Security Administration. It is not appropriate to make a change solely for the purpose of achieving a higher discount rate or avoiding a change in the assumed discount rate. Key Characteristics Valuations measure the long term and do not directly reflect risk- Section 3.15, Phase-In of Changes in Assumptions, was added to provide guidance regarding the phase-in of changes in assumptions. Welcome to Viewpoint, the new platform that replaces Inform. Throughout this standard, any reference to selecting economic assumptions also includes giving advice on selecting economic assumptions. Assuming pension plans achieve a conservative 3 percent return in fiscal year 2019-2020, Reason Foundation Pension Integrity Project's calculations show that the 20-year aggregate average rate of return would be only about 5.9 percent, falling far short of the current weighted average assumed rate of return of 7.25 percent. . 8 0 obj The last revision of ASOP No. 9 Even if investments fall short of the long-term return assumption, the amount set aside for each retiree should be enough to pay for the base benefit without . The actuary should take into account the purpose of the measurement as a primary factor in selecting a discount rate. In these situations, if per capita claims cost estimates indicate that the cap will not be reached in certain years for at least some participants, projections of future health care coverage (rather than only the dollar-defined cap) would be required for those years. An internal rate of return (IRR) is the interest rate at which the net present value of all cash flows for a corporate or financial investment, including the initial investment, is equal to zero. Some of these assumptions are economic assumptions covered under this ASOP, and some are noneconomic assumptions covered under ASOP No. Investment PolicyThe plans investment policy may include the following: (i) the current allocation of the plans assets; (ii) types of securities eligible to be held (diversification, marketability, social investing philosophy, etc. the Investment Return Assumption Key Points The expected investment return for a pension plan's assets is used as the discount rate for public and multiemployer pension plan valuations and is sometimes referred to as the "actuarial" rate of return. Warning: Each web version of an ASOP is provided as is for convenience of the user only and is not, and should not be considered to be, the official version of an ASOP. Consistency is not necessarily achieved by maintaining a constant difference between one economic assumption and another. xT]k@|?R >vC Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. For example, if the benefit fund must pay taxes on its investment earnings, such taxes should be included in the projection of expected returns. The Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. e. Expenses Paid from Plan AssetsInvestment and other administrative expenses may be paid from plan assets. The actuary is not required to use a particular type of economic assumption or to select a more refined economic assumption when in the actuarys professional judgment such use or selection is not expected to produce materially different results. Projected returns should be reduced by any outflows associated with generating those returns. The ASB also thanks its former Pension Committee members and, in particular, former Pension Committee chairperson Christopher F. Noble for their contribution in the drafting of this standard. In it, the fund's actuary projected that pension costs would likely exceed $220 million annually by 2038, eating up 32% of the T's operating revenue. http://greenbook-waysandmeans.house.gov/ The sum of those asset mix weighted expected rates of return for each component are then added together to determine the total expected rate of return. In some cases, particularly in certain non-US territories, observed yields on certain high-quality corporate bonds can be negative for certain bond durations. 1 Assumption changesprimarily states lowering the assumed rate of return used to calculate pension costsaccounted for another $138 billion in increased . For example, the difference in yields between inflation-linked and non-inflation-linked bonds may include premiums for liquidity and future inflation risk in addition to an estimate of future inflation. xmHQEO\"CzaXYaRaTfAHD/)~`IP(I*%#"LzPB J=gf`0`00q~?_R&%%01G[32QFJXRieLpM!w: ^~ Y~=G@ BX2:R"NQY~~!noTL)A7QzEDD|!_>hhh v m'#>}uG_ 'NHnlo2A GZ#"J [l. In that case, the facts and circumstances of each plan will need to be assessed, including past practices and cost sharing arrangements, in order to determine the substantive plan of each employee group. Judgment should be applied to determine whether a planned change is probable. A specific assumption or method that is selected by another party, to the extent that law, regulation, or accounting standards give the other party responsibility for selecting such an assumption or method. The period subsequent to the measurement date during which a particular economic assumption will apply in a given measurement. If the actuary determines that the guidance in this standard conflicts with ASOP Nos. 3 0 obj http://www.cbo.gov/publication/43907. Expected rates of return. The Arizona Public Safety Personnel Retirement System administers a plan for public safety personnel comprised of three tiers depending on participants' date of hire. Multiple investment return rates may include the following: a. Note: This appendix is provided for informational purposes but is not part of the standard of practice. However, the selection or advice should reflect the actuarys professional judgment. C`dEV-SC"8iAvWWtt7y} 7dgR VZm8U-6'`w3LG =! j. When reviewing available plan-sponsor-specific compensation data, the actuary should take into account the credibility of these data. The decline in the average reflects small changes across most individual plans since 2008 (Figure 1b), not large changes for only a few plans. If high-quality corporate bonds available in the marketplace are trading at negative yields (i.e., their present value is greater than their nominal future cash flows), an employer would need to purchase an amount of bonds that exceeds the notional undiscounted future benefit payments to generate a stream of future cash flows to pay the benefits when due. To the extent such expenses are not otherwise recognized, the actuary should reduce the investment return assumption to reflect these expenses. Depending on the magnitude and duration of benefit payments for a particular plan, these negative yields could meaningfully reduce the overall discount rate for a benefit plan or even lead to an overall negative discount rate, particularly for plans with primarily shorter-duration payments. So it is fair to ask whether they are necessary and what an appropriate scope for review is. For this purpose, an assumption or method selected by a governmental entity for a plan that such governmental entity or a political subdivision of that entity directly or indirectly sponsors is a prescribed assumption or method set by another party. Yl`pn*"!SU+JEc1/Ig?fJ=K?u$fx4)$,+|M.3'@ Z{$43n/_I#%$94]soR%t9^R,jw&YRfB,c'^. c. U.S. Federal Reserve Weekly Statistical Release H.15. Ifthecurrent assumed rate of return is below the mid-pointin the range, half of the excess gains will be used to lower the assumption. The conversion factors may be variable (for example, recalculated each year based on a stated mortality table and interest rate equal to the yield on 30-year Treasury bonds). Alternatively, the actuary may be in an advisory position, helping the legislative body, plan sponsor, or governing board of trustees select the assumptions. i. <> 27 adopted September 2013 are summarized below. Said differently, it would not be appropriate for a reporting entity to use a bond matching approach to calculate the projected benefit obligation and a disaggregated yield curve approach to determine service and interest cost in the following period. Minor wording or punctuation changes that are suggested but not significant are not reflected in the appendix, although they may have been adopted. Nothing in this standard is intended to require the actuary to select an economic assumption that has otherwise been selected by another party. peb_guide. Therefore, a weighted-average or "blended" discount rate, based on individual discount rates applicable to the varying periods until the benefits are due, should be used for discounting the pension benefit obligation and related pension cost components (i.e., service cost and interest cost). Document Number: 197 In these situations, the compensation increase assumption may reflect a shortened measurement period that ends at the expected termination date. Separate Assumptions for Different Employee GroupsDifferent compensation increases are assumed for two or more employee groups that are expected to receive different levels or patterns of compensation increases. Thus, subsequent to the mergers, companies served by those actuarial firms have access to new discount rate methodologies. 2 0 obj ASC 715-60-35-79 and 35- 80 outline similar requirements for the selection of assumptions for other post-retirement employee benefit (OPEB) plans. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. Tax Status of the Funding VehicleIf the plans assets are not kept in a tax-exempt fund, income taxes may reduce the plans investment return. However, for some purposes (such as qualified pension plan minimum required contribution calculations), the actuary may be precluded by applicable laws or regulations from anticipating future plan amendments or future cost-of-living adjustments in certain IRC limits. Social Security Bulletin. The first decade of the 21st century contained a significant amount of debate inside and outside the actuarial profession regarding the measurement of pension obligations. Callable bonds should not be included in any bond matching (or included using the yield to the call date). If the current assumed rate of return is at or above the mid-point in the range, the full amount of excess gains will be used to lowerthe assumption. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. Under these plans, the dollar-denominated cap can be fixed, increased automatically (indexed), or redetermined on an ad hoc basis. The investment return assumption can then be determined based on an asset allocation that results in an appropriate amount of risk. Once the published yield is adjusted based on the considerations listed above, it is acceptable to round to the next 25 basis point interval, if the employer's policy is to do so. For each measurement date, the actuary should reassess the individual assumptions selected by the actuary and the relationships among them, and make appropriate adjustments. The objective when selecting assumed discount rates for purposes of measuring a plans benefit obligations is to determine the single amount that, if invested at the measurement date in a portfolio of high-quality corporate debt instruments, would provide the necessary future cash flows to pay the benefits when due. Publication date: 31 Oct 2021. us Pensions guide 2.4. The investment return assumption reflects the anticipated returns on the plans current and, if appropriate for the measurement, future assets. The actuary should also review recent gain and loss analyses, if any. We use cookies to personalize content and to provide you with an improved user experience. In such plans, the untimely liquidation of securities at depressed values may be required to meet benefit obligations. Notable changes made to the second exposure draft are summarized below. It may be a single rate, it may vary by age or service, or it may vary over future years. c. Investment VolatilityPlans investing heavily in those asset classes characterized by high variability of returns may be required to liquidate those assets at depressed values to meet benefit obligations. Select and Ultimate Investment Return RatesAssumed investment return rates vary by period from the measurement date (for example, returns of x% for the first 10 years following the measurement date and y% thereafter). Among the 131 funds that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020 as . The findings of the study are important in part because they draw attention to possible linkages between the quality of financial information that is reported about the financial condition of public pension funds . The Pension Task Force provided its report to the ASB in February 2016. Interest rate information for selected Treasury securities. Two scenarios when these duration adjustments might be made are: (1) when the population of participants is comprised primarily of retirees, thus causing the plans expected benefit payment stream to have a relatively short duration, or (2) when the population of participants is comprised of very few retirees and a relatively young active workforce, thus causing the plans expected benefit payment stream to have a relatively long duration. Historically, actuaries have used various practices for selecting economic assumptions. Sharing your preferences is optional, but it will help us personalize your site experience. As expected, there is a positive correlation between expected rate of return and the amount of plan assets The actuary should apply professional judgment in determining whether, given the purpose of the measurement, the payroll growth assumption should be based on a closed or open group and, if the latter, whether the size of that group should be expected to increase, decrease, or remain constant. e. Expected Plan Freeze or TerminationIn some situations, as stated in section 3.8.3(h), the actuary may expect the plan to be frozen or terminated at a determinable date. resulting real rate of return assumption. In a pension plan context, it is the discount rate that equates future . PwC. 27 of the U.S. Daily Monthly Annually. In preparing calculations for purposes other than current-year plan valuations, actuaries often use economic assumptions that are different from those used for the current-year valuation. In order to measure a pension obligation, the actuary will typically need to select or assess assumptions underlying the obligation. endstream endobj 1792 0 obj <>stream The actuary should identify the types of economic assumptions to use for a specific measurement. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. Growth rate 5% per year over 35 years. In some other circumstances, an additional assumption regarding an expected increase in pay in the final year of service may be used. In practice, this discount rate (return on asset) assumption may be set by the legislative body, plan sponsor, a governing board of trustees, or the actuary. The distinction between the pension liability discount rate assumption and the investment return assumption is often blurred in practice because it is assumed that they are numerically equal. The terms below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP. The preceding paragraph permits an employer to look to rates of return on high-quality fixed-income investments in determining assumed discount rates. If the actuary takes into account the investment policy in selecting an investment return assumption, the actuary should consider reflecting whether the current investment policy is expected to change during the measurement period. The assumption used to measure the anticipated year-to-year change in compensation is referred to as the compensation increase assumption.

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