pension rate of return assumptions

The preceding paragraph permits an employer to look to rates of return on high-quality fixed-income investments in determining assumed discount rates. 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. endobj 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. Contributions expected to be made in future years should not be considered in determining the expected long-term rate of return on plan assets. 2.3 Demographic assumptions in pension and OPEB plans, 2.5 Attribution of benefits to periods of service. 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. 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. The American Academy of Actuaries does not warrant or represent that the web version of any ASOP is accurate and disclaims any and all warranties that are or might otherwise be applicable including, without limitation, any warranties of merchantability or fitness for a particular purpose. b. any such assumption that the actuary is unable to assess for reasonableness for the purpose of the measurement (section 3.14). 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. Summarized here are the significant issues and questions contained in the comment letters and the responses to each. 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 Note: This appendix is provided for informational purposes but is not part of the standard of practice. 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. 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 should take appropriate steps to determine the time horizon, the price inflation, and the expenses reflected in the expected returns. 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. Much of the debate centered on the economic assumptions actuaries use to measure these obligations. The investment return assumption used to measure pension liabilities 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. Eighteen comment letters were received and considered in making changes that were reflected in the second exposure draft. In February 2022 theMERSBoard adopted a dedicated gains policy for systematically reducing the investment return assumption when actual investmentreturnsexceed the plan's current assumed rate of return. The rates of change in a groups compensation attributable to the change in the real value of goods or services per unit of work. Each member firm is a separate legal entity. Measurement purposes may include the following: a. PDF Fundamentals of pension accounting and funding - American Academy of For each measurement date, the actuary should reassess the individual assumptions selected by the actuary and the relationships among them, and make appropriate adjustments. Company name must be at least two characters long. 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. Although less common, an OPEB health care plan may define the retiree's deductible or contribution based on similar criteria. The actuary may use multiple compensation increase assumptions in lieu of a single compensation increase assumption. 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. Alternatively, the actuary may use a discount rate appropriate for defeasance, settlement, or market-consistent measurements. Over the past decade, pension funds have lowered the return assumptions that inform their investment decisions from a median of 8% in 2009 to 7.25% as of 2019. January 5, 2021. The assumed rate of return should always fall within the range of reasonable assumptions. An internal rate of return (IRR) is the interest rate at which the net present value of all cash flows for a corporate or financial investment, including the initial investment, is equal to zero. 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. d. historical national wage increases and productivity growth. Taxes may be reflected by an explicit reduction in the total investment return assumption or by a separately identified assumption. 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. An employer is required to measure its share of costs for health care services by projecting future costs. 7 0 obj PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. f. Cash Flow TimingThe timing of expected contributions and benefit payments may affect the plans liquidity needs and investment opportunities. As discussed in ASOP No. 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. 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. @l17=D2HN-&X$r`3 NLl`{)"3 Those changes are classified as actuarial gains or losses. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. In concept, notwithstanding the long-term nature of pension and OPEB arrangements, this period-to-period volatility is an appropriate reflection of the current cost of servicesi.e., the cost of services purchased in the current period should reflect current period prices. 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. 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. 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. PDF NASRA Issue Brief Unless the measurement period is short, the actuary should not give undue weight to short-term patterns. 8#i) RJM0i/-I oYqOTr;9iprU=&?~UOLXRgGG1IcvL!:s(nT.uJH5X#QG jo(DJ 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. Those rates shall be extrapolated from the existing yield curve at the measurement date. The actuary should select economic assumptions that reflect the actuarys knowledge as of the measurement date. In preparing calculations for purposes other than current-year plan valuations, actuaries often use economic assumptions that are different from those used for the current-year valuation. Pension Debt Grows as Public Pension Systems Post Low Investment The actuary should evaluate appropriate inflation data. b. U.S. Department of Labor, Bureau of Labor Statistics. ASC 715-60-35-79 and 35- 80 outline similar requirements for the selection of assumptions for other post-retirement employee benefit (OPEB) plans. 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. This document contains a revision of ASOP No. As expected, there is a positive correlation between expected rate of return and the amount of plan assets In December 2014, the ASB formed the Pension Task Force and charged it with reviewing these comments and other relevant reports and input to develop recommendations for ASB next steps. The official version of an ASOP is as set forth in the PDF version of the ASOP, which may be downloaded from this site. Actuaries practicing in this area are becoming accustomed to changing assumptions frequently. 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. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. hb```B eahd0/- n:|x)`#pF]F y! Callable bonds should not be included in any bond matching (or included using the yield to the call date). 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. 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. The actuary should consider preparing and retaining documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. For example, if a pension program reduced its . <> The expected rate of return on assets is the long-term expectation of the annual earnings rate on the assets of the pension fund. Politics latest updates: NHS 'on the brink' says nursing union; 10% Judgment will be necessary to determine what constitutes a consistent past practice of increases. Summary of Notable Changes from the Existing ASOP No. Principal value Total interest. 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. 5 0 obj Select a section below and enter your search term, or to search all click In a pension plan context, it is the discount rate that equates future . Pension obligation values incorporate assumptions about pension payment commencement, duration, and amount. The second exposure draft was issued in June 2019 with a comment deadline of September 15, 2019. Generally, a participants compensation will increase over the long term in accordance with inflation, productivity growth, and merit adjustments. General economic inflation, defined as price changes over the whole of the economy. Judgment should be applied to determine whether a planned change is probable. ` U Deterministic vs. Stochastic models: A guide to forecasting for pension ? . 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. 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. For each economic assumption that has a significant effect on the measurement and that the actuary has not selected (other than prescribed assumptions or methods set by law or assumptions disclosed in accordance with section 4.2[a] or [b]), the actuary should disclose the information and analysis used to support the actuarys determination that the assumption does not significantly conflict with what, in the actuarys professional judgment, is reasonable for the purpose of the measurement. 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. [1] A discount rate is used to calculate present values of expected future payments. 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. 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. t*t3;]4N 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. hk0}E0yn&jjRC~w#gF(pNw? Valuation Basis - uses all the assumptions in the plan's valuation as of the current actuarial valuation date. 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. The ASB thanks everyone who took the time to contribute comments and suggestions on the exposure drafts. 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. For example, the actuary may provide advice on selecting economic assumptions under US GAAP or Governmental Accounting Standards even though another party is ultimately responsible for selecting these assumptions. In these circumstances, the assumptions should be revised. The median return for state-managed plans was 27% in 2021. The actuary should not assume that superior or inferior returns will be achieved, net of investment expenses, from an active investment management strategy compared to a passive investment management strategy unless the actuary believes, based on relevant supporting data, that such superior or inferior returns represent a reasonable expectation over the measurement period. 35. Economic assumptions pertain to such factors as the rate of wage growth and the future expected investment return on the fund's assets.

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