Economic assumptions have a significant effect on any pension obligation measurement. Some of these assumptions are economic assumptions covered under this ASOP, and some are noneconomic assumptions covered under ASOP No. Alternatively, the actuary may use a discount rate appropriate for defeasance, settlement, or market-consistent measurements. Such a switch would have to be supported by an appropriate rationale as to why the new methodology would provide a better estimate under the circumstances. ) &L%3 %FRY=s6XhrLj-IL+(\Y`?YV}_rFhq|~H,Cu`13sb%K_|4dy>K++_l`}^N&+ D#Sz The results also indicate that the adopted assumptions are influenced by asset allocations and the fiscal condition of pension plans. 4 or 6 will govern. 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. The discount rate is currently equal to the expected rate of return on investment based on historic al rates. Selection of Economic Assumptions for Measuring Pension Obligations, TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in the Selection of Economic Assumptions for Measuring Pension Obligations, SUBJ: Actuarial Standard of Practice (ASOP) No. 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 actuary may assume multiple investment return rates in lieu of a single investment return rate. 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. In July 2015, the ASB held a public hearing on actuarial standards of practice applicable to actuarial work regarding public plans. 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. When selecting a compensation increase assumption, the actuary should take into account the following: The actuary should evaluate available compensation data. The objective of selecting assumed discount rates using that method is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the pension benefits when due. Notable changes made to the second exposure draft are summarized below. Consequently, the discount rate for a plan covering only retired employees would be expected to differ from the discount rate used for a plan covering a relatively young work force. Pension obligation values incorporate assumptions about pension payment commencement, duration, and amount. Pension obligation values also require discount rates to convert future expected payments into present values. 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. The actuary may use multiple compensation increase assumptions in lieu of a single compensation increase assumption. This actuarial standard of practice (ASOP or standard) does the following: a. provides guidance to actuaries when performing actuarial services that include selecting (including giving advice on selecting) economic assumptionsprimarily investment return, discount rate, post-retirement benefit increases, inflation, and compensation increasesfor measuring obligations under defined benefit pension plans; b. supplements the guidance in ASOP No. The actuary should take into account factors specific to each measurement in selecting an investment return assumption. Consumer Price Index. The expected rate of return on assets is the long-term expectation of the annual earnings rate on the assets of the pension fund. 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. Considering the inflation component. 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. 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.. b. the disclosure in ASOP No. 7 0 obj
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g,Z 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. If a conflict exists between this standard and applicable law, the actuary should comply with applicable law. 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. b. A change in facts and circumstances may, however, warrant a change in the approach for determining the discount rate. The rate shown applies to the plans Non-Hazardous plan, which accounts for more than 90 percent of the Kentucky ERS plan liabilities. 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. d. Compensation VolatilityIf certain elements of compensation, such as bonuses and overtime, tend to vary materially from year to year, or if aberrations exist in recent compensation amounts, then volatility should be taken into account. Welcome to the Division of Investment. h. Expected Plan TerminationIn some situations, the actuary may expect the plan to be terminated at a determinable date. 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. In developing this model, the actuary has assumed that interest rates will remain flat over the five-year period and that the plan's assets will experience an annual return equal to the plan sponsor's expected return on asset assumption for financial reporting under ASC 715. b. Defeasance or SettlementAn actuary measuring a plans present value of benefits on a defeasance or settlement basis may use a discount rate implicit in annuity prices or other defeasance or settlement options. endobj
The cap may be defined in the aggregate for the retiree group. Information regarding the constituent bonds in the related bond index. Are you still working? 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 . It is generally inappropriate to use the yield on a single issuers bond as the discount rate even if it is of equal duration and sufficient magnitude to the benefit obligation. ;0*TvaRUK~NU!-Jq HtkH E#|/E\D^%H+juYqB:I':IG%@&3QNZw${?Fw'm2V!fU3PBwc?52mD+h#S%|1kbb7p5~5"o-XbS
GjhAN3~d&52 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. 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. http://www.bls.gov/cpi/ The disclosure may be brief but should be pertinent to the plans circumstances. d. historical national wage increases and productivity growth. Select and ultimate inflation rates vary by period from the measurement date (for example, inflation of x% for the first 5 years following the measurement date and y% thereafter). 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. Multiple investment return rates may include the following: a. In the public plan arena, many entities perform assumption reviews every few years, and these reviews may or may not lead to assumption adjustments. General economic inflation, defined as price changes over the whole of the economy. Thus, subsequent to the mergers, companies served by those actuarial firms have access to new discount rate methodologies. 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. 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. ASC 715-60-35-79 and 35- 80 outline similar requirements for the selection of assumptions for other post-retirement employee benefit (OPEB) plans. Eighteen comment letters were received and considered in making changes that were reflected in the second exposure draft. For example, some actuaries have looked to surveys of economic assumptions used by other actuaries, some have relied on detailed research by experts, some have used highly sophisticated projection techniques, and many actuaries have used a combination of these. The Division, under the Council's supervision, is one of the largest U.S. pension fund managers in the United States. In making this determination, the actuary should take into account changes in relevant factors known to the actuary that may affect future experience. These assumptions include the discount rate and estimate of future salary and benefits levels. 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. Assumed rates of return on corporate bonds vary from 1 to 4 per cent . When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. This standard applies to the actuarial advice given in such situations, within the constraints imposed by the relevant accounting standards. Notionally, that single amount, the projected benefit obligation, would equal the fair value of a portfolio of high-quality zero coupon bonds whose maturity dates and amounts would be the same as the timing and amount of the expected future benefit payments. For an employer using a benchmark approach, the following information should be maintained or updated/re-evaluated each period to support the discount rate: A plans benefit cash flows are often such that the employers discount rate can be supported more consistently by using spot-rate yield curves or a specific bond matching approach rather than a benchmark approach. hbbd```b``A$YH#"o@Q9.b? Draft revisions of ASOP Nos. Additionally, the expected long-term rate of return on plan assets is an important component when determining the net benefit cost each reporting period. Minor wording or punctuation changes that are suggested but not significant are not reflected in the appendix, although they may have been adopted. 25, Credibility Procedures, for additional guidance. Valuation Basis - uses all the assumptions in the plan's valuation as of the current actuarial valuation date. 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. 4 If the actuary determines that the guidance in this standard conflicts with ASOP Nos. The actuary may want to adjust estimates based on observations to reflect the various risk premiums and other factors (such as supply and demand for tradable bond or debt securities) that might be reflected in market pricing. Under a benchmark approach, entities start with a rate from a published bond index and make certain adjustments, either upward or downward, to reflect the individual facts and circumstances of their plans. The actual increases in the dollar-denominated amount reflect a consistent past practice. 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. 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. JULY 15, 2020. 4, 23, Data Quality, 25, 35, 41, and 51. Calculate. The following list of references is a representative sample of available sources of economic data and analyses that may be useful when selecting economic assumptions. The actuary should disclose any explicit adjustment made in accordance with section 4.1.1. The Chair also reminded the Board that the actuary performs an experience study every five years, so this issue will be revisited. Therefore, the substantive plan approach (see. 32, Social Insurance (unless ASOPs on social insurance explicitly call for application of this standard). In some companies, the nonbargained employee group receives the same retiree health benefits as the collectively bargained employee group, and changes to the bargained plan have historically been made to the nonbargained plan at the same time. <>
e. U.S. Social Security Administration. Publication date: 31 Oct 2021. us Pensions guide 2.4. The actuary may also take into account historical and current statistical data showing standard deviations, correlations, and other statistical measures related to historical or future expected returns of each asset class and to inflation. When assuming select and ultimate investment return rates, the actuary should consider reflecting the relationships among inflation, interest rates, and market appreciation or depreciation. If you have any questions pertaining to any of the cookies, please contact us us_viewpoint.support@pwc.com. Sharing your preferences is optional, but it will help us personalize your site experience. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations. 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 ASB thanks everyone who took the time to contribute comments and suggestions on the exposure drafts. Interest rate assumption--Suspension of new supplemental pension contracts--No right to particular price. Assessing forward-looking capital markets returns for the individual asset classes. Measurement purposes may include the following: a. National Association of State Retirement Administrators. 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. The average investment return rate assumption for U.S. public pensions has fallen below 7.0% to its lowest level in more than 40 years, according to the National Association of State Retirement Administrators. Alternatively, the actuary may be in an advisory position, helping the legislative body, plan sponsor, or governing board of trustees select the assumptions. Small changes of 25 or 50 basis points in these assumptions can change the measurement by several percentage points or more. The actuary should follow the general process described in section 3.3 to select these assumptions. It may also be an important factor for a plan of any size that provides highly subsidized early retirement benefits, lump-sum benefits, or supplemental benefits triggered by corporate restructuring or financial distress. 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). The 3, 5, 10, and 20-year returns are 11.00%, 11.17%, 9.19%, and 7.65% respectively. 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 investment return assumption used to measure pension liabilities As you can see, changing the annual average pension growth rate . Taxes may be reflected by an explicit reduction in the total investment return assumption or by a separately identified assumption. Statistical Abstract of the United States. Details are available online: 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. The actuary should select economic assumptions that reflect the actuarys knowledge as of the measurement date. the SEC staff expects registrants to use discount rates to measure obligations for pension benefits and postretirement benefits other than pensions that reflect the current level of interest rates. For example, actuaries working with small plans may prefer to emphasize the results of general research to comply with this standard. 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. Under these plans, the dollar-denominated cap can be fixed, increased automatically (indexed), or redetermined on an ad hoc basis.
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