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. 3-12C-1502. The actuarial assumptions (e.g., assumed rate of return on investments, inflation, medical expenses) are used to determine the amount of the systems' liabilities and the amount the state must pay each year to help fund the plans on an ongoing basis. Expected rates of return reflect the plan sponsor's outlook based on the plan's asset allocation. Under these plans, the dollar-denominated cap can be fixed, increased automatically (indexed), or redetermined on an ad hoc basis. 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 Used for ASC 715 Purposes - Deloitte hb```B eahd0/- n:|x)`#pF]F y! 3 0 obj Interest rate information for selected Treasury securities. 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. 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. For each previously selected assumption that the actuary determines is no longer reasonable, the actuary should select a reasonable new assumption. 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). To the extent such expenses are not otherwise recognized, the actuary should reduce the investment return assumption to reflect these expenses. 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. Under ASC 715, the expected rate of return on assets is a component of the employee benefit cost. The terms below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP. Pension obligation values incorporate assumptions about pension payment commencement, duration, and amount. These disclosures may be brief but should be pertinent to the plans circumstances. b. PDF Fundamentals of pension accounting and funding - American Academy of 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 investment return assumption reflects the anticipated returns on the plans current and, if appropriate for the measurement, future assets. <> For a reporting entity that currently utilizes the bond matching approach to calculate discount rates and determine its projected benefit obligation, it would likely be difficult to justify changing to a yield curve approach in order to utilize disaggregated spot rates to develop interest cost and service cost. ]7S[A HY7>hlS*M It is also the assumption that varies most among the different liability measurements, ranging from current yields on high-quality corporate bonds to long-term expected rates of return on assets. The general effects of the changes should be disclosed in words or by numerical data, as appropriate. This assumption is typically constructed by considering various factors including, but not limited to, the time value of money; inflation and inflation risk; illiquidity; credit risk; macroeconomic conditions; and growth in earnings, dividends, and rents. The actuary should refer to ASOP No. A change in facts and circumstances may, however, warrant a change in the approach for determining the discount rate. From 2008 through 2012, discount rates fell every year an accumulated decline of 234 basis points before finally rising in 2013 (Figure 5). JULY 15, 2020. 5 0 obj 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. Taxes may be reflected by an explicit reduction in the total investment return assumption or by a separately identified assumption. Financial Reporting Considerations Related to Pension and Other e. U.S. Social Security Administration. 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. Those rates shall be extrapolated from the existing yield curve at the measurement date. For example, if a pension program reduced its . The staff suggests that fixed-income debt securities that receive one of the two highest ratings given by a recognized ratings agency be considered high quality (for example, a fixed-income security that receives a rating of Aa or higher from Moody's Investors Service, Inc.). 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. Purpose, Scope, Cross References, and Effective Date, 2.5 Prescribed Assumption or Method Set by Another Party, 2.6 Prescribed Assumption or Method Set by Law, Section 3. Last Revised: June 2020 2.4 Financial assumptions when measuring the plan obligation. The employer communicates its intent to raise the dollar-denominated amount (i.e., the cap) in the future (e.g., to keep pace with inflation), or. In developing a reasonable assumption for these factors and in combining the factors to develop the investment return assumption, the actuary may take into account a broad range of data and other inputs, including the judgment of investment professionals. 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. 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. All ASOPs Home Selection of Economic Assumptions for Measuring Pension Obligations, PDF Version: Download Here The actuary should select economic assumptions that reflect the actuarys knowledge as of the measurement date. IoD 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.. Section 3.16, Documentation, was revised to remove the requirement that when preparing documentation the actuary should prepare documentation in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuarys work or could assume the assignment if necessary. Rates reflect all known announced rates as of November 2022. The actuary may use multiple compensation increase assumptions in lieu of a single compensation increase assumption. 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. In order to measure a pension obligation, the actuary will typically need to select or assess assumptions underlying 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. 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. Funding valuations for these types of plans often use a discount rate related to the expected return on plan assets. 41, section 4.3, if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method set by a party other than the actuary; and. 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 objective in determining an appropriate discount rate using a bond-matching approach is to match cash flows of the plan to principal redemptions on zero coupon bonds. Investment Rate of Return (Discount Rate) The FY 2021 investment rate of return, as reported by the PICM is 33.55%. The ASB voted in June 2020 to adopt this standard. In such cases, the rounding technique should be unbiased. Growth rate 5% per year over 35 years. Projected returns should be reduced by any outflows associated with generating those returns. Before the changes in ASOP 27, actuarial specialists often would specifically disclaim any assessment regarding the expected long-term rate of return assumption when management selected the assumption and the actuary was not directly involved in the . 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). 32, Social Insurance (unless ASOPs on social insurance explicitly call for application of this standard). Document Status: Adopted. Contributions expected to be made in future years should not be considered in determining the expected long-term rate of return on plan assets. In nonprescribed situations, practice is still dependent upon the individual actuary. 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. In some other circumstances, an additional assumption regarding an expected increase in pay in the final year of service may be used. All rights reserved. . The actuary may assume select and ultimate inflation rates in lieu of a single inflation rate. In making this determination, the actuary should take into account changes in relevant factors known to the actuary that may affect future experience. As expected, there is a positive correlation between expected rate of return and the amount of plan assets Labour leader Sir Keir Starmer this morning described Sue Gray as a woman with a "formidable reputation" as he faces pressure to explain the circumstances of her job offer. 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. Eighteen comment letters were received and considered in making changes that were reflected in the second exposure draft. The actuary should take into account factors specific to each measurement in selecting an investment return assumption. All assumptions should reflect consistent expectations of future economic conditions, such as future rates of inflation. Key Characteristics Valuations measure the long term and do not directly reflect risk- The lower expected rates of return assumptions in almost all the developed countries for 2021 could possibly be attributed to a more conservative stand by pension sponsors regarding the fixed-income and equity markets returns in the future. 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. 51. For example, if the published yield as of the measurement date of 5.66% is adjusted by eight basis points to reflect annual versus semi-annual interest payments (so 5.74%), it could then be rounded to 5.75%. peb_guide. In addition, the actuary should consider whether an experience study should be performed; however, the actuary is not required to perform an experience study. 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 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. 1 0 obj Specific expertise may be needed to compute and support an appropriate adjustment. Nonetheless, such a change should be accompanied by a sound rationale in support of the change. Public Pensions' Assumed Rate of Return Falls Below 7% January 5, 2021. Green Book: Background Material and Data on Programs within the Jurisdiction of the Committee. 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). 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. Do we really need an experience study? - Buck | Buck Asset Allocation and the Investment Return Assumption The actuary should follow the general process described in section 3.3 to select these assumptions. 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. e. Expenses Paid from Plan AssetsInvestment and other administrative expenses may be paid from plan assets. A 2019 amendment to the Mississippi PERS funding policy stipulates that the investment return assumption will be reduceduntil it reaches the rate recommended by the actuary in the most recent experience study using investment gains based on the following parameters: 2% excess return over assumed rate, lowerassumption by 5 basis points, 5% excess return over assumed rate, lowerassumption by 10basis points, 8% excess return over assumed rate, lowerassumption by 15basis points, 12% excess return over assumed rate, lowerassumption by 20basis points, 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., Chart: Latest distribution of investment return assumptions, Chart: Historical distribution of investment return assumptions, Chart: Historical change in median and average investment return assumption, Issue Brief: Investment Return Assumptions, Looking Forward: The Application of the Discount Rate in Funding US Government Pensions, September 2018, Asset Allocation and the Investment Return Assumption, American Academy of Actuaries, July 2020. 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. In such plans, the untimely liquidation of securities at depressed values may be required to meet benefit obligations. As expected, there is a positive . For each economic assumption that has a significant effect on the measurement and that the actuary has selected, the actuary should disclose the information and analysis used to support the actuarys determination that the assumption is reasonable. Or, because tax rates may rise at the end of 2025, you can switch to project your federal taxes using higher rates in the Assumptions section of My Plan. d. examining annuity prices to estimate the market price to settle pension obligations. Notable Changes from the Second Exposure Draft. Figure PEB 2-1 illustrates the calculation of the expected long-term rate of return using a weighted average approach. The actuary should identify the types of economic assumptions to use for a specific measurement. 34, Actuarial Practice Concerning Retirement Plan Benefits in Domestic Relations Actions, that relates to the selection and use of economic assumptions. 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. For example, the actuary may disclose any specific approaches used, sources of external advice, and how past experience and future expectations were considered in determining the assumption to be reasonable. Estimating the projection horizons for the expected returns. The investment return assumption, which includes gain-sharing, is currently 7.60%. Yl`pn*"!SU+JEc1/Ig?fJ=K?u$fx4)$,+|M.3'@ Z{$43n/_I#%$94]soR%t9^R,jw&YRfB,c'^. Measuring certain pension plan obligations may require converting from one payment form to another, such as converting a projected individual account balance to an annuity, converting an annuity to a lump sum, or converting from one annuity form to a different annuity form. UksyqOiiXdQN~[n:)Kp. b. The last revision of ASOP No. The actuarys report should state the source of any assumption that the actuary has not selected. 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. The actuarys discretion over economic assumptions has been curtailed in many situations. 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. Across all plans in the data, the average return assumptions of pensions has declined from 8.02 percent in 2001 to 7.60 percent in 2015. Sufficient detail should be shown to permit another qualified actuary to assess the level and pattern of each assumption. Draft revisions of ASOP Nos. The Pension Committee carefully considered all comments received, and the ASB reviewed (and modified, where appropriate) the changes proposed by the Pension Committee. An upward or downward adjustment to the yield of the index when the duration of the benefit stream is either significantly longer or shorter, respectively, than the duration of the bonds in the index. The investment return assumption can then be determined based on an asset allocation that results in an appropriate amount of risk. 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). The actuary should take into account the balance between refined economic assumptions and materiality. Average Public Pension Assumed Rate of Return Hits 40-Year Low 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. The average change differs statistically from zero for most . The trouble with pension projections | Financial Times Principal value Total interest. Alternatively, the actuary may be in an advisory position, helping the legislative body, plan sponsor, or governing board of trustees select the assumptions. For shorter-term financial projections (less than 10 years), financial planners may use actual rates of return on fixed-term investments held to maturity and dividend yields on equities. Summary of Notable Changes from the Existing ASOP No. 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. ) &L%3 %FRY=s6XhrLj-IL+(\Y`?YV}_rFhq|~H,Cu`13sb%K_|4dy>K++_l`}^N&+ D#Sz 3rd ed. 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. The actuary should also include the following, as applicable, in an actuarial report: a. the disclosure in ASOP No. PwC. . Nothing in this ASOP is intended to require the actuary to disclose confidential information. Assumptions such as compensation increases or cash balance crediting rates are often used to determine projected benefit streams for valuation purposes. Capital Publications, Inc., P.O. 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. e. select a reasonable assumption (section 3.6). c. U.S. Federal Reserve Weekly Statistical Release H.15. We use cookies to personalize content and to provide you with an improved user experience. 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. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. 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. d. Investment Manager PerformanceAnticipating superior (or inferior) investment manager performance may be unduly optimistic (or pessimistic). For PlannerPlus users, income taxes are estimated using all currently available state and federal tax rates and tax brackets through longevity. . 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. 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. B. The median public pension plan's investments returned about 1 percent in 2016, well below the median assumption of 7.5 percenta disparity that added about $146 billion to the debt. Two key takeaways from this data are that a) a lower assumed rate of inflation . A specific assumption or method that is mandated or that is selected from a specified range or set of assumptions or methods that is deemed to be acceptable by applicable law (statutes, regulations, and other legally binding authority). The investment return assumption used for Tier 3 is 7.0%.. a. Kellison, Stephen G. The Theory of Interest. The Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. [1] A discount rate is used to calculate present values of expected future payments. The assumed long-term inflation assumption underlying the expected rate of return should be consistent with the inflation assumption underlying the salary increase and discount rate assumptions. j. 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. 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 disclosure may be brief but should be pertinent to the plans circumstances. 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 . 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. This might be the case when the employer has changed actuarial firms and the previously used spot-rate yield curve is no longer available, or the employer's actuary or an outside vendor develops a new curve that produces a discount rate that the client believes more appropriately reflects the characteristics of its benefit obligation. 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. xT]k@|?R >vC One approach to setting the payroll growth assumption may be to reduce the compensation increase assumption by the effect of any assumed merit increases. The Chair also reminded the Board that the actuary performs an experience study every five years, so this issue will be revisited. 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.
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