pension rate of return assumptions

Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. For example, an employer may agree to bear annual costs equal to a specified dollar amount multiplied by the number of plan participants in each future year. For these plans, the employer would measure its obligation for all years in which the cap is expected to be operative by estimating the future dollar amount of the annual cap. Company name must be at least two characters long. Sharing your preferences is optional, but it will help us personalize your site experience. The degree of such documentation should be based on the professional judgment of the actuary and may vary with the complexity and purpose of the actuarial services. The items listed above, as well as other market observations or prices, include estimates of future experience as well as other considerations. If the ratio of Actuarial Value of Assets to Market Value of Assets is below 80% or above 120%, excess market gains will not be used to lower or buy down the rate of return, and the normal smoothing method will be applied. 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. For example, employers that determine their discount rates by matching a plan's specific cash flows to a spot-rate yield curve or individual high-quality bonds may switch from one acceptable spot-rate yield curve to another acceptable curve, or switch from an acceptable curve to an acceptable bond match. 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. In addition, the actuary should take steps to determine the type of forward-looking expected returns (i.e., forward-looking expected geometric returns or forward-looking expected arithmetic returns) and that they are used appropriately. With respect to a particular measurement, the actuary should select economic assumptions that are consistent with the other assumptions selected by the actuary, including demographic and other noneconomic assumptions, unless an assumption considered individually is not material (see section 3.5.2). 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. In these situations, the compensation increase assumption may reflect a shortened measurement period that ends at the expected termination date. Document Number: 197 The actuary should select economic assumptions that reflect the actuarys knowledge as of the measurement date. Considering, quantifying, and documenting any other adjustments to the bond index yield. While this is an unusual situation that was not specifically contemplated in the accounting guidance, we believe that the actual observed market rates should be utilized. It may be a single rate, it may vary by age or service, or it may vary over future years. The actuary should evaluate appropriate inflation data. The Pension Task Force provided its report to the ASB in February 2016. Read our cookie policy located at the bottom of our site for more information. The rates of change in an individuals compensation attributable to personal performance, promotion, seniority, or other individual factors. ESG - Environmental, Social and Governance, https://www.calpers.ca.gov/docs/board-agendas/201702/financeadmin/item-9a-02.pdf, Looking Forward: The Application of the Discount Rate in Funding US Government Pensions, Asset Allocation and the Investment Return Assumption, North Carolina Teachers and State Employees. The expected long-term rate of return on plan assets should generally be based on the investment portfolio that existed as of the measurement date without consideration of proposed changes to the portfolio subsequent to the measurement date. ) &L%3 %FRY=s6XhrLj-IL+(\Y`?YV}_rFhq|~H,Cu`13sb%K_|4dy>K++_l`}^N&+ D#Sz Notable Changes from the Second Exposure Draft. Different actuaries will apply different professional judgment and may choose different reasonable assumptions. However, in other than a zero coupon portfolio, such as a portfolio of long-term debt instruments that pay semiannual interest payments or whose maturities do not extend far enough into the future to meet expected benefit payments, the assumed discount rates (the yield to maturity) need to incorporate expected reinvestment rates available in the future. The general effects of the changes should be disclosed in words or by numerical data, as appropriate. Economic assumptions have a significant effect on any pension obligation measurement. <> yEM$] O|ivO,j7+6[ VV_fX)cv(GNY1=(O{t.ZQJc:U`%vqwT7`=I"7aa1 Hw3Up$x"c0FbB1QcPT~sz~Ev,K86,:Q]ju}${|TRVHrcL[]TWD! Pension obligation values incorporate assumptions about pension payment commencement, duration, and amount. The actuary should disclose any explicit adjustment made in accordance with section 4.1.1. 8 0 obj Colorado Springs, CO: McGraw-Hill, 2008. endstream endobj 1792 0 obj <>stream Applying financial economic theory to the measurement of pension obligations has been controversial and has produced a significant amount of debate in the actuarial profession, which has continued in the present decade. Some large actuarial firms have developed specific bond matching models and nearly all of the largest actuarial firms and other organizations have developed spot-rate yield curves to assist employers in developing their discount rate assumptions. Benefit Payments Covered by Designated Current or Projected AssetsThe actuary may assume one investment return rate for benefit payments covered by designated current or projected plan assets on the measurement date and a different investment return rate for the balance of the benefit payments and assets. 1821 0 obj <>stream National Association of State Retirement Administrators. You can set the default content filter to expand search across territories. Rates reflect all known announced rates as of November 2022. We use cookies to personalize content and to provide you with an improved user experience. The ASB provides guidance for measuring pension and retiree group benefit obligations through the series of ASOPs listed below. 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. 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. Congressional Budget Offices economic forecast. 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. 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 internal controls should be designed to ensure that the amounts reported in the financial statements properly reflect the underlying assumptions (e.g., discount rate, estimated long-term rate of return, mortality, turnover, health care costs) and that the documentation maintained in the entity's accounting records sufficiently . endobj Thus, subsequent to the mergers, companies served by those actuarial firms have access to new discount rate methodologies. For this purpose, an assumption is reasonable if it has the following characteristics: a. it is appropriate for the purpose of the measurement; b. it reflects the actuarys professional judgment; c. it takes into account current and historical data that is relevant to selecting the assumption for the measurement date, to the extent such relevant data is reasonably available; d. it reflects the actuarys estimate of future experience, the actuarys observation of the estimates inherent in market data (if any), or a combination thereof; and. 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 types of economic assumptions used to measure pension obligations may include inflation, investment return, discount rate, compensation increases, and other economic factors such as Social Security, cost-of-living adjustments, rate of payroll growth, growth of individual account balances, and variable conversion factors. You are already signed in on another browser or device. 32, Social Insurance (unless ASOPs on social insurance explicitly call for application of this standard). Summary of Notable Changes from the Existing ASOP No. The rate shown applies to the plans Non-Hazardous plan, which accounts for more than 90 percent of the Kentucky ERS plan liabilities. a. U.S. Bureau of the Census. 4 0 obj For pay-related plans, the calculation of the benefit obligation would reflect expected compensation levels, including changes attributable to inflation, seniority, promotion, and other factors. Interest rate assumption--Suspension of new supplemental pension contracts--No right to particular price. The Pension Committee carefully considered all comments received, and the ASB reviewed (and modified, where appropriate) the changes proposed by the Pension Committee. The actuarys report should state the source of any assumption that the actuary has not selected. To evaluate relevant data, the actuary should review appropriate recent and long-term historical economic data. The rate selected from the index or indices, as well as the adjustments made to that rate, should be supported. The report included suggestions for changes to the ASOPs that would apply to all areas of pension practice. 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. 27, Selection of Economic Assumptions for Measuring Pension Obligations, was issued in June 2019 with a comment deadline of September 15, 2019. 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. Many actuaries change assumptions infrequently, while other actuaries reevaluate the assumptions as of each measurement date and change economic assumptions more frequently. 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. The actuary should take into account the following when applicable: Depending on the purpose of the measurement, the actuary may determine that it is appropriate to adjust the economic assumptions to provide for adverse deviation or reflect plan provisions that are difficult to measure. Recent Data, Various Indexes, and Some Historical Data. UksyqOiiXdQN~[n:)Kp. e. Expenses Paid from Plan AssetsInvestment and other administrative expenses may be paid from plan assets. 3-12C-1502. If a conflict exists between this standard and applicable law, the actuary should comply with applicable law. The actuary should take into account the balance between refined economic assumptions and materiality. The selected assumptions should also satisfy the consistency requirement of section 3.12. Assumptions such as compensation increases or cash balance crediting rates are often used to determine projected benefit streams for valuation purposes. The following should be considered as appropriate adjustments to the indices: Other adjustments to the index (e.g., to replace the bonds in the index with lower quality bonds to obtain a higher yield) are not generally appropriate. c. Separate Assumptions for Different Compensation ElementsDifferent compensation increases are assumed for two or more compensation elements that are expected to change at different rates (for example, x% bonus increases and y% increases in other compensation elements). But many pensions have annual investment return assumptions in the 7-8% p.a. For example, if pension benefits are a function of base compensation and the plan sponsor is changing its compensation practice to put greater emphasis on incentive compensation, future growth in base compensation may differ from historical patterns. 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.

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