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Assumed discount rates should be reevaluated at each measurement date, including interim remeasurements required in connection with accounting for plan amendments, settlements, curtailments or other significant events. assumptions, it may be an indicator that things are shifting. ` U Figure PEB 2-1 illustrates the calculation of the expected long-term rate of return using a weighted average approach. Accordingly, it may be more appropriate to consider forward-looking capital markets returns for the plans investments. b. U.S. Department of Labor, Bureau of Labor Statistics. Mergers periodically occur between certain actuarial firms that had their own proprietary methods for developing assumed discount rates. The disclosures should be based on the economic assumptions as of the measurement date at which they are applied without regard to changes to the assumptions planned for future measurement dates. Such factors may include the following: a. PwC. For example, a collective bargaining agreement ratified after the measurement date may lead the actuary to change the compensation increase assumption that otherwise would have been selected. Two key takeaways from this data are that a) a lower assumed rate of inflation . It is often called the valuation interest rate. Determining the best estimate. January 5, 2021. For example, actuaries working with small plans may prefer to emphasize the results of general research to comply with this standard. The investment return assumption can then be determined based on an asset allocation that results in an appropriate amount of risk. PDF 2022 Florida Local Government Retirement Systems Actuarial Fact Sheet range, which are closer to the pre-2000 average return. http://www.federalreserve.gov/releases/h15/ 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. Congressional Budget Offices economic forecast. 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. Ifthecurrent assumed rate of return is below the mid-pointin the range, half of the excess gains will be used to lower the assumption. For example, if a pension program reduced its . d. examining annuity prices to estimate the market price to settle pension obligations. For situations in which both the demographic assumptions and economic assumptions have changed from those previously used for the same type of measurement, the actuary may disclose the general effects of the changes separately or combined, as appropriate. Deterministic vs. Stochastic models: A guide to forecasting for pension The ASB thanks everyone who took the time to contribute comments and suggestions on the exposure drafts. b. As a result of terminations and new participants, total payroll generally grows at a different rate than does a participants salary or the average of all current participants combined. Summarized here are the significant issues and questions contained in the comment letters and the responses to each. Having access to a new methodology would not, by itself, be considered a change in facts or circumstances that supports switching to the use of that methodology. The actuary should take into account the purpose of the measurement as a primary factor in selecting a discount rate. IoD Considering, quantifying, and documenting any negative adjustments to the bond index yield for callable bonds included in the index. 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. 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. Committee on Retirement Systems Practice Education, and the Pension and Health Sections, Society of Actuaries. 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. The actuary should evaluate appropriate inflation data. The PBO and APBO will also be immediately affected by discount rate changes. Select and Ultimate AssumptionsAssumed compensation increases vary by period from the measurement date (for example, x% increases for the first 5 years following the measurement date, and y% thereafter) or by age or service. Each member firm is a separate legal entity. These ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services. The first exposure draft was issued in March 2018 with a comment deadline of July 31, 2018. resulting real rate of return assumption. PDF Annual Report to the Comptroller on Actuarial Assumptions - 2021 4 Are you still working? PDF 2021 Global Survey of Accounting Assumptions - wtwco.com <> 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. The Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. In addition, the actuary should disclose the following in such actuarial reports: The actuary should describe each significant economic assumption used in the measurement and, to the extent known, whether the assumption represents an estimate of future experience, an observation of the estimates inherent in market data, or a combination thereof. 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. If applicable, the actuary should disclose the time period of relevant plan or plan sponsor experience that was last analyzed, including the date of any study used in the selection process. (For this, the system will employ the 2017 rates . 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 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. 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. 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). The actuary should take into account factors specific to each measurement in selecting a specific compensation increase assumption. The assumed rate of return should always fall within the range of reasonable assumptions. The actuary should select economic assumptions that reflect the actuarys knowledge as of the measurement date. For example, if the benefit fund must pay taxes on its investment earnings, such taxes should be included in the projection of expected returns. Pension obligation values also require discount rates to convert future expected payments into present values. 2 0 obj If the dollar-denominated caps are based on the results of collective bargaining with a labor union, there is a general presumption under. 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. The investment return assumption, which includes gain-sharing, is currently 7.60%. For PlannerPlus users, income taxes are estimated using all currently available state and federal tax rates and tax brackets through longevity. Estimated rate of return. Principal value Total interest. Compensation data may include the following: a. the plan sponsors current compensation practice and any anticipated changes in this practice; b. current compensation distributions by age or service; c. historical compensation increases and practices of the plan sponsor and other plan sponsors in the same industry or geographic area; and. 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. b. Cost of living latest: Aldi and Lidl branching into new neighbourhood PDF 03/31/23 04:44 pm PENSIONS SL/LD H3100.S3162-DE1 The rate shown applies to the plans Non-Hazardous plan, which accounts for more than 90 percent of the Kentucky ERS plan liabilities. The UK's biggest discount supermarkets are increasingly eyeing a new market of their own; several employers have signed up to a pension scheme which could see them pay in 7% of your salary; and . Taxes may be reflected by an explicit reduction in the total investment return assumption or by a separately identified assumption. Specific expertise may be needed to compute and support an appropriate adjustment. 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. This content is copyright protected. NASRA 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. 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. 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. Small changes of 25 or 50 basis points in these assumptions can change the measurement by several percentage points or more. hbbd```b``A$YH#"o@Q9.b? Please see www.pwc.com/structure for further details. The investment return assumption reflects the anticipated returns on the plans current and, if appropriate for the measurement, future assets. 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. 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 20-7, Financial Reporting Considerations Related to Pension - Deloitte The actuary should disclose any changes in the significant economic assumptions from those previously used for the same type of measurement. e. U.S. Social Security Administration. PDF Used for ASC 715 Purposes - Deloitte 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. 6, Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined Contributions, that relates to the selection and use of economic assumptions; and. Assumptions such as compensation increases or cash balance crediting rates are often used to determine projected benefit streams for valuation purposes. 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. Information regarding the constituent bonds in the related bond index. 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. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. ? Changes in the OASDI contribution and benefit base are determined from changes in national average wages, which reflect the change in national productivity and inflation. Even if there is likely a range of potential returns, using either the most optimistic or most pessimistic assumptions is likely not reflective of the most likely scenario (best estimate). As expected, there is a positive correlation between expected rate of return and the amount of plan assets endstream NASRA Among the 131 plans that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020. 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. h. Expected Plan TerminationIn some situations, the actuary may expect the plan to be terminated at a determinable date. 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. For each assumption that is neither a prescribed assumption or method set by another party nor a prescribed assumption or method set by law, the actuary should include an explanation of the information and analysis that led to the change. Interest rates (sometimes referred to as yields or yields to maturity) generally vary depending on the remaining maturity or duration of the obligation. [,V$5|Tu`%Lw}yAY#"45--"syE)v+oO5^9jR@byd\w-O^6,T|@YYfjq Y) bwb|W} `}52=^Oz4o{e]V[X_y h B *@H @lXAZf$GGg2E;h@j Cp3"gtxP+rKknBI396``P47y)#+H301= Compensation PracticeThe plan sponsors current compensation practice and any contemplated changes may affect the compensation increase assumption, at least in the short term. 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. 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. Although a helpful starting point, these approaches should be carefully reviewed to assess whether they incorporate appropriate bonds and bond pricing, effectively match the specific plans expected benefit cash flow stream, and incorporate reasonable assumptions about reinvestment of excess bond cash flows and yields for bond maturities in years in which no bonds exist (e.g., beyond 30 years). The actuary should take into account factors specific to each measurement in selecting an investment return assumption. Green Book: Background Material and Data on Programs within the Jurisdiction of the Committee. The footnotes at the bottom of the page, which reflect additional explanations, qualifications, and scheduled future developments for certain plans, are a critical component of this data set. Please see appendix 2 for a detailed discussion of the comments received and the reviewers responses. 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. The actuary should disclose any explicit adjustment made in accordance with section 4.1.1. Thus, subsequent to the mergers, companies served by those actuarial firms have access to new discount rate methodologies. If a conflict exists between this standard and applicable law, the actuary should comply with applicable law. The investment return assumption, which includes gain-sharing, is currently 7.60%. The Pension Committee carefully considered all comments received, and the ASB reviewed (and modified, where appropriate) the changes proposed by the Pension Committee. The State Pension Funding Gap: 2016 | The Pew Charitable Trusts Additionally, the expected long-term rate of return on plan assets is an important component when determining the net benefit cost each reporting period. When the actuary is developing an investment return assumption by combining two or more components or factors, the actuary should ensure that the combination of these components or factors is logically consistent. 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. 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). peb_guide. 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). hb```B eahd0/- n:|x)`#pF]F y! http://www.bls.gov/cpi/ The discount rate is currently equal to the expected rate of return on investment based on historic al rates. 27 Adopted September 2013. Notable changes from the existing 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. For example, the assumed rate of investment return for the pension plans was 7 percent for . It may be a single rate, it may vary by age or service, or it may vary over future years. 1 Assumption changesprimarily states lowering the assumed rate of return used to calculate pension costsaccounted for another $138 billion in increased . All ASOPs Home Selection of Economic Assumptions for Measuring Pension Obligations, PDF Version: Download Here Depending on a particular measurements circumstances, the actuary may disclose information about specific interrelationships among the assumptions (for example, investment return: x% per year, net of investment expenses and including inflation at y%). The trouble with pension projections | Financial Times Annual Yearbook, market results 1926 through previous year. NY *e yEM$] 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! As you can see, changing the annual average pension growth rate . 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. DiNapoli: State Pension Fund Posts 9.5% Annual Investment Return 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. Taking into account the purpose of the measurement, materiality, and the cost of using refined assumptions, the actuary may determine that it is appropriate to apply a rounding technique to the selected economic assumption. 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. In order to measure a pension obligation, the actuary will typically need to select or assess assumptions underlying the obligation. In making this determination, the actuary should take into account changes in relevant factors known to the actuary that may affect future experience. The actuary may advise the plan sponsor about the selection of the discount rate. 35. The rates of change in a groups compensation attributable to the change in the real value of goods or services per unit of work. t*t3;]4N The general effects of the changes should be disclosed in words or by numerical data, as appropriate. The rate selected from the index or indices, as well as the adjustments made to that rate, should be supported. 41 for guidance related to the retention of file material other than that which is to be disclosed under section 4. The expected rate of return on assets is the long-term expectation of the annual earnings rate on the assets of the pension fund. Discount Rate Assumption 6.00% 6.50% 7.00% 7.50% 8.00% 8.50% 9.00% 9.50% . Section 3.15, Phase-In of Changes in Assumptions, was added to provide guidance regarding the phase-in of changes in assumptions. hk0}E0yn&jjRC~w#gF(pNw? Estimating the projection horizons for the expected returns. 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. The most common approach to determining the expected long-term rate of return on plan assets is to develop a weighted average based on the mix of plan assets. Key Characteristics Valuations measure the long term and do not directly reflect risk-
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