Similar to the demographic information discussed in, The assumed discount rates should be reevaluated at each measurement date (including interim remeasurements required in connection with accounting for plan amendments, curtailments, and settlements) to determine whether they continue to reflect the best estimates of then-current rates (see, The SEC staff provided guidance on the selection of discount rates in. The ASB voted in June 2020 to adopt this standard. Select a section below and enter your search term, or to search all click However, the selection or advice should reflect the actuarys professional judgment. Economic assumptions pertain to such factors as the rate of wage growth and the future expected investment return on the fund's assets. The second exposure draft was issued in June 2019 with a comment deadline of September 15, 2019. The discount rate assumption, arguably the most critical economic assumption in determining a pension obligation, is used to determine the discounted present value of all benefit streams that are part of such obligation measurement. Calculate. 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. Public Pensions' Assumed Rate of Return Falls Below 7% The discount rate is the most significant economic assumption used to calculate a plan's liability. Also, some actuarial cost methods take into account the present value of future compensation. Challenges for the UK pension system: the case for a pensions review Consumer Price Index. The actuary should develop a reasonable economic assumption based on the actuarys estimate of future experience, the actuarys observation of the estimates inherent in market data, or a combination thereof. <> In some cases, particularly in certain non-US territories, observed yields on certain high-quality corporate bonds can be negative for certain bond durations. Due to the uncertain nature of the items for which assumptions are selected, the actuary may consider several different assumptions reasonable for a given measurement. Company name must be at least two characters long. Considering, quantifying, and documenting any negative adjustments to the bond index yield for callable bonds included in the index. g. Benefit VolatilityBenefit volatility may be a primary factor for small plans with unpredictable benefit payment patterns. peb_guide. Compound frequency. To evaluate relevant data, the actuary should review appropriate recent and long-term historical economic data. stream 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. PDF 2022 Florida Local Government Retirement Systems Actuarial Fact Sheet The rate selected from the index or indices, as well as the adjustments made to that rate, should be supported. The actuary should evaluate appropriate investment data. The average change differs statistically from zero for most . Those rates shall be extrapolated from the existing yield curve at the measurement date. Investment Return Assumptions of Public Pension Funds The Chair also reminded the Board that the actuary performs an experience study every five years, so this issue will be revisited. 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. Minor wording or punctuation changes that are suggested but not significant are not reflected in the appendix, although they may have been adopted. Statistics for Employee Benefits Actuaries. Under ASC 715, the expected rate of return on assets is a component of the employee benefit cost. Green Book: Background Material and Data on Programs within the Jurisdiction of the Committee. For purposes of this appendix, the term commentator may refer to more than one person associated with a particular comment letter. Please see www.pwc.com/structure for further details. 25, Credibility Procedures, for additional guidance. 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. http://www.federalreserve.gov/releases/h15/ The FASB concluded that, conceptually, the basis for determining the assumed discount rates for measuring the expected postretirement benefit obligation (EPBO) and the service cost component for OPEB plans should be the same as the basis for determining the assumed discount rates for pension measurements. c. historical and current investment data including, but not limited to, real and nominal returns, the inflation and inflation risk components implicit in the yield of inflation-protected securities, dividend yields, earnings yields, and real estate capitalization rates. The Pension Committee carefully considered all comments received, and the ASB reviewed (and modified, where appropriate) the changes proposed by the Pension Committee. Ifthecurrent assumed rate of return is below the mid-pointin the range, half of the excess gains will be used to lower the assumption. Regardless of the approach used traditional bond matching or yield curve approach or a disaggregated yield curve approach the measurement of the projected benefit obligation and the measurement of the ensuing periods service and interest cost must be based on the same discount rate methodology. Interest Rate - For pension funding, this assumption is used to discount future benefits to determine plan liabilities and it should be a reasonable expectation of the future rate of return on the pension plan's assets. National Association of State Retirement Administrators. From 2008 through 2012, discount rates fell every year an accumulated decline of 234 basis points before finally rising in 2013 (Figure 5). ASC 715-60-35-79 and 35- 80 outline similar requirements for the selection of assumptions for other post-retirement employee benefit (OPEB) plans. Examples of multiple compensation increase assumptions include the following: a. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate. endobj 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.. Notable Changes from the Second Exposure Draft. After completing these steps for each economic assumption, the actuary should review the set of economic assumptions for consistency (section 3.12) and make appropriate adjustments if necessary. hbbd```b``A$YH#"o@Q9.b? ); (iii) a stationary or dynamic target allocation of plan assets among different classes of securities; and (iv) permissible ranges for each asset class within which the investment manager is authorized to make investment decisions. The actuary should refer to ASOP No. In July 2015, the ASB held a public hearing on actuarial standards of practice applicable to actuarial work regarding public plans. 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. 2022 Global Survey of Accounting Assumptions for Defined Benefit - WTW b. Certain plan benefits have components directly related to the accumulation of real or hypothetical individual account balances (for example, floor-offset arrangements and cash balance plans). 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. Effect of ReinvestmentTwo reinvestment risks are associated with traditional, fixed income securities: (i) reinvestment of interest and normal maturity values not immediately required to pay plan benefits, and (ii) reinvestment of the entire proceeds of a security that has been called by the issuer. 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. 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. Welcome to Viewpoint, the new platform that replaces Inform. Chicago, IL: Ibbotson Associates. The terms below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP. 34, Actuarial Practice Concerning Retirement Plan Benefits in Domestic Relations Actions, that relates to the selection and use of economic assumptions. 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. At each measurement date, the actuary should assess the reasonableness of each economic assumption that the actuary has not selected (other than prescribed assumptions or methods set by law or assumptions disclosed in accordance with section 4.2[b]), using the guidance set forth in this standard to the extent practicable. d. U.S. House of Representatives, Committee on Ways and Means. A discount rate may be a single rate or a series of rates, such as a yield curve. Compensation is a factor in determining participants benefits in many pension plans. 41, Actuarial Communications, an assumption may be selected by the actuary or selected by another party. Interest rate assumption--Suspension of new supplemental pension contracts--No right to particular price. 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. The expected long-term rate of returnon plan assets is determined as of the measurement date and should reflect the average rate of return expected to be earned on the funds invested over the period until the benefits are expected to be paid. The assumed rate of return for the Nebraska School Retirement System will decline by 10 basis points each year until reaching 7.0 percent effective FY 24. Are you still working? endstream endobj 1789 0 obj <>/Metadata 110 0 R/Pages 1786 0 R/StructTreeRoot 298 0 R/Type/Catalog/ViewerPreferences 1809 0 R>> endobj 1790 0 obj <>/MediaBox[0 0 612 792]/Parent 1786 0 R/Resources<>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI]/XObject<>>>/Rotate 0/StructParents 0/Tabs/S/Type/Page>> endobj 1791 0 obj <>stream 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 official version of an ASOP is as set forth in the PDF version of the ASOP, which may be downloaded from this site. These data may include the following: a. current yields to maturity of fixed income securities such as government securities and corporate bonds; b. forecasts of inflation, GDP growth, and total returns for each asset class; and. The service cost component of net periodic benefit cost could be volatile from year to year as a result of using current discount rates because the changes in discount rates will immediately affect the PBO and EPBO, which is the basis for determining service cost. The actuary should select assumptions (both demographic assumptions selected in accordance with ASOP No. The present value of expected future pension payments may be calculated from the perspective of different parties, recognizing that different parties may have different measurement purposes. Examples of how the actuary may observe estimates inherent in market data include the following: a. comparing yields on inflation-indexed bonds to yields on equivalent non- inflation-indexed bonds as a part of estimating the markets expectation of future inflation; b. comparing yields on bonds of different credit quality to determine market credit spreads; c. observing yields on U.S. Treasury debt of various maturities to determine a yield curve free of credit risk; and. Actuaries can still set other economic assumptions, such as compensation increases, inflation, or fixed income yields. The general effects of the changes should be disclosed in words or by numerical data, as appropriate. B. L7/G -e"s =~Nbd+1Tc(c4>}8S*MIroaBR8-*IaSMzWW] HSgY{s$!:}v{$OQ!9A)+C [xK;R%g]c{LI;2'Nj'u=uc&((#K@6F[eT)@kYyaP'$HH1ya^e~NdrebLr|u?91'XgiruYop g,Z Actuaries practicing in this area are becoming accustomed to changing assumptions frequently. Despite beating investment return targets by 20% in 2021, many public pension plans are now taking the opportunity to reduce their investment risks by lowering investment return rate assumptions to more realistic long-term growth rates. 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). The rates of change in an individuals compensation attributable to personal performance, promotion, seniority, or other individual factors. Experience studies, which look at a pension plan's valuation assumptions compared to recent actual rates, are an important part of pension plan actuarial practice. Welcome to the Division of Investment. b. any such assumption that the actuary is unable to assess for reasonableness for the purpose of the measurement (section 3.14). In these cases, we believe there is no change in methodology because the methodology in use continues to be based on a cash flow matching approach. To be clear, as Treasurer I serve as Secretary of the Investment Advisory Council, and am an ex officio member of the governing boards of the State's largest pension plans - the State Employees' Retirement Commission and the Teachers' Retirement Board. Financial Reporting Considerations Related to Pension and Other Note: This appendix is provided for informational purposes but is not part of the standard of practice. General economic inflation, defined as price changes over the whole of the economy. e. select a reasonable assumption (section 3.6). Section 1.2, Scope, was expanded to clarify the application of the standard when an economic assumption is not selected by the actuary and whenever the actuary has an obligation to assess the reasonableness of an economic assumption that the actuary has not selected. NJ Division of Investment Figure 6 clearly illustrates that the returns assumptions used in the Pensions Commission modelling are no longer applicable - the real rates of return assumed by the Pensions Commission were 2.5 percentage points (ppt) higher for government bonds, 2.4 ppt higher for corporate bonds and 2.0 ppt higher for equity markets than PwC's latest . 112.664(1)(b) - uses same mortality assumption as 112.664(1)(a) but using an assumed discount rate equal to 200 basis points (2.00%) less than plan's assumed rate of return. Assumptions such as compensation increases or cash balance crediting rates are often used to determine projected benefit streams for valuation purposes. Mergers periodically occur between certain actuarial firms that had their own proprietary methods for developing assumed discount rates. Politics latest updates: NHS 'on the brink' says nursing union; 10% The cap may be defined in the aggregate for the retiree group. For PlannerPlus users, income taxes are estimated using all currently available state and federal tax rates and tax brackets through longevity. Given the availability of other yield curve and bond-matching approaches, use of a benchmark approach to develop discount rates is increasingly uncommon. Contribution BudgetingAn actuary evaluating the sufficiency of a plans contribution policy may choose among several discount rates. Nonetheless, such a change should be accompanied by a sound rationale in support of the change. For example, if the benefit fund must pay taxes on its investment earnings, such taxes should be included in the projection of expected returns. Similarly, if investment management fees are charged against the actual return on assets, such outflows should be included in the expected return projection. When an economic assumption is not selected by the actuary, the guidance in section 3.14 and section 4 concerning assessment and disclosure applies. The WRS' long-term return assumption for 2017 was 7.2 percent; however, the plan uses a lower discount rate of 5 percent to calculate the cost of benefits for workers once they retire. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions. Depending on a particular measurements circumstances, the actuary may disclose information about specific interrelationships among the assumptions (for example, investment return: x% per year, net of investment expenses and including inflation at y%). The investment return assumption used by public pension plans typically contains two components: inflation and the incremental return above the assumed rate of inflation, or the real rate of return. The actuary may use multiple compensation increase assumptions in lieu of a single compensation increase assumption. The actuary should refer to ASOP No. The actuary should take into account the possibility that some historical economic data may not be appropriate for use in developing assumptions for future periods due to changes in the underlying environment. This document contains a revision of ASOP No. xT]k@|?R >vC Whether the assumed rate of return is lowered, and the magnitude of any reduction, depends on the excess gains available and the most recent range of reasonable economic assumptions as provided byMERS' consulting actuary. Despite historic 2021 returns, many public pension plans are wisely South Dakota Codified Laws 3-12C-1502 (2022) - Interest rate ` U In June 2016, the ASB directed its Pension Committee to draft appropriate modifications to the actuarial standards of practice, in accordance with ASB procedures, to implement the suggestions of the Pension Task Force. The type and quality of bonds in the hypothetical portfolio may depend on the particular type of market-consistent measurement. After identifying the types of economic assumptions to be used for the measurement, the actuary should follow the general process set forth below for selecting each economic assumption for a specific measurement: a. identify components, if any, of the assumption; c. take into account factors specific to the measurement; d. take into account other general considerations, when applicable (section 3.5); and. 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 trouble with pension projections | Financial Times Please seewww.pwc.com/structurefor further details. Comparing the timing and amount of cash outflows of the bonds in the index to the defined benefit plan's expected cash outflows for benefits, and quantifying/documenting the basis for any positive or negative adjustments to the bond index yield relative to the cash flow analysis. The actuary may assume multiple investment return rates in lieu of a single investment return rate. In these situations, the actuary may select an investment return assumption that reflects a shortened measurement period that ends at the expected termination date. Over 50 comment letters were received covering a wide variety of potential ASB actions. Investment Rate of Return (Discount Rate) The FY 2021 investment rate of return, as reported by the PICM is 33.55%. Assumed discount rates are used in measurements of the projected, accumulated, and vested benefit obligations and the service and interest cost components of net periodic pension cost. Estimated rate of return. Under this policy a portion of the excess returns will continue to be smoothed over a five year period, and some of the excess return will be immediately recognized to offset the increase in contributions. Why does one defined benefit pension plan have so many - Milliman Because most publicly traded bonds included in the various models bear interest at a stated coupon, it would generally be appropriate to adjust the yields in the model (most likely upward) to reflect this difference. All rights reserved. Pension obligation values also require discount rates to convert future expected payments into present values. !P3{%[4~:VMY! P(RIEr=8'B6/82AKEWm(9{UxUBkzeuzI/U2-SFOgC5B@+NlWq^;zWNe0Qh=`=[U[aN`K#xsOjPW1>Zf3[N +[ENr=pT>U9wo#-LX7{.WPiL}|DpWMpU}jGKRZT}o~4 Section 3.5.6, Views of Experts (now Other Sources of Economic Data and Analyses), was renamed and clarified to provide for use of other sources of economic data and analyses. Taxes may be reflected by an explicit reduction in the total investment return assumption or by a separately identified assumption. Determining the best estimate. Details are available online: https://www.calpers.ca.gov/docs/board-agendas/201702/financeadmin/item-9a-02.pdf. h. Expected Plan TerminationIn some situations, the actuary may expect the plan to be terminated at a determinable date. If an entity sponsors more than one pension or postretirement benefit plan, it may be appropriate to choose different discount rates for different plans on the same measurement date because of differing average durations until benefit payments are made and differing patterns of cash flow requirements. In some instances, that discount rate may be approximated by market yields for a hypothetical bond portfolio whose cash flows reasonably match the pattern of benefits expected to be paid in the future. The actuary should take into account factors specific to each measurement in selecting an investment return assumption. The ASB thanks everyone who took the time to contribute comments and suggestions on the exposure drafts. PDF Actuarial Review Presentation to the San Diego City Council 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. C`dEV-SC"8iAvWWtt7y} 7dgR VZm8U-6'`w3LG =! In response to specific requests for changes in the ASOPs and other activity related to public pension plans, in July 2014 the ASB issued a Request for Comments on the topic of ASOPs and Public Pension Plan Funding and Accounting. Similarly, if the assumed rate of return exceeds the top of the range, MERS will reduce the assumption so that it falls within the high end of the range. 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 not a prescribed assumption or method set by law. The actuarys discretion over economic assumptions has been curtailed in many situations. Plan benefits or limits affecting plan benefits, including the Internal Revenue Code (IRC) section 401(a)(17) compensation limit and section 415(b) maximum annuity, may be automatically adjusted for inflation or assumed to be adjusted for inflation in some manner (for example, through regular plan amendments). PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. 1 Assumption changesprimarily states lowering the assumed rate of return used to calculate pension costsaccounted for another $138 billion in increased . Do we really need an experience study? - Buck | Buck For example, the actuary may expect a plan to terminate when the owner retires, or a frozen plan to terminate when assets are sufficient to provide all accumulated plan benefits. Changes in the approach should generally be limited to changes that produce a more refined estimate of the discount rate, such as changing from a benchmark approach (see. b. For companies that currently utilize a yield curve approach to calculate discount rates and the projected benefit obligation, assuming management believes it produces a better estimate of their benefit costs, a change to such an approach would be treated as a change in estimate under. It is appropriate in estimating those rates to look to available information about rates implicit in current prices of annuity contracts that could be used to effect settlement of the obligation (including information about available annuity rates published by the Pension Benefit Guaranty Corporation). Thus, subsequent to the mergers, companies served by those actuarial firms have access to new discount rate methodologies. bond yield rates as of the Measurement Date. It is not intended to be an exhaustive list. Cost of living latest: Aldi and Lidl branching into new neighbourhood ? A discount rate is used to calculate the present value of expected future plan payments. 29.22 relating to retirement; reducing the actuarial assumption for investment rate of 29.23 return; eliminating the delay to normal retirement age on the commencement of 29.24 postretirement adjustments and reducing the vesting requirement for the general 29.25 employees retirement plans of the Minnesota State Retirement System and the If a conflict exists between this standard and applicable law, the actuary should comply with applicable law. Rate of Return Assumptions Hounded by Market Changes - usicg.com [1] A discount rate is used to calculate present values of expected future payments. Interest rates (sometimes referred to as yields or yields to maturity) generally vary depending on the remaining maturity or duration of the obligation. Ifthecurrent assumed rate of return is below the mid-pointin the range, half of the excess gains will be used to lower the assumption. What average pension growth rate can you expect? - Monevator 3 0 obj We believe, however, that it may be acceptable for employers to consider probable changes in the portfolio mix (e.g., to bring it back in line with the target mix or to align with a new target mix), provided the changes will occur in a reasonable period of time and have been approved by the appropriate level of management. In a recently released Issue Brief, the Academy of Actuaries discusses the interplay of the rate of return assumption and the investment mix.Focusing on the long-term return rate assumption for defined benefit pension plans, a familiar idiom comes to mind: "Don't let the tail wag the dog." Plan obligations increased by roughly 11% in 2019, mostly due to a decline in discount rates used to measure pension obligations. With respect to assumptions that the actuary has not selected, other than prescribed assumptions or methods set by law, the actuarys report should identify the following, if applicable: a. any such assumption that significantly conflicts with what, in the actuarys professional judgment, is reasonable for the purpose of the measurement (section 3.14); or.