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. Effective Date: August 01, 2021 Two key takeaways from this data are that a) a lower assumed rate of inflation . The Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. c. Collective BargainingThe collective bargaining process impacts the level and pattern of compensation changes. Public Pension Funds and Assumed Rates of Return: An Empirical 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). In these situations, the compensation increase assumption may reflect a shortened measurement period that ends at the expected termination date. However, they cost money and require considerable effort. Compound Interest Calculator - NerdWallet The investment return assumption, which includes gain-sharing, is currently 7.60%. Minor wording or punctuation changes that are suggested but not significant are not reflected in the appendix, although they may have been adopted. 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. 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. 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. Funding valuations for these types of plans often use a discount rate related to the expected return on plan assets. So it is fair to ask whether they are necessary and what an appropriate scope for review is. endobj Different plans . Under this approach in Figure PEB 2-1, it is appropriate to consider the following: Many pension plans, and some OPEB plans, are pay related, requiring an assumption as to future salary increases. All ASOPs Home Selection of Economic Assumptions for Measuring Pension Obligations, PDF Version: Download Here However, the selection or advice should reflect the actuarys professional judgment. The decline in the average reflects small changes across most individual plans since 2008 (Figure 1b), not large changes for only a few plans. e. U.S. Social Security Administration. As discussed in ASOP No. 32, Social Insurance (unless ASOPs on social insurance explicitly call for application of this standard). 27 was issued in September 2013. The 3, 5, 10, and 20-year returns are 11.00%, 11.17%, 9.19%, and 7.65% respectively. 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. Assumed discount rates shall be reevaluated at each measurement date. b. Rate of increase in pensions, both in deferment and in payment; . The findings of the study are important in part because they draw attention to possible linkages between the quality of financial information that is reported about the financial condition of public pension funds . 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). 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). Asset Allocation and the Investment Return Assumption Company name must be at least two characters long. It may be a single rate, it may vary by age or service, or it may vary over future years. 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. Also, some actuarial cost methods take into account the present value of future compensation. In some cases, particularly in certain non-US territories, observed yields on certain high-quality corporate bonds can be negative for certain bond durations. Rate of Return Assumptions Hounded by Market Changes - usicg.com 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. The general effects of the changes should be disclosed in words or by numerical data, as appropriate. The trouble with pension projections | Financial Times 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. Accordingly, it may be more appropriate to consider forward-looking capital markets returns for the plans investments. Economic assumptions have a significant effect on any pension obligation measurement. 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. Considering, quantifying, and documenting any other adjustments to the bond index yield. 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 certain circumstances, such as a temporary reduction or freeze in compensation, the compensation increase assumption may be negative or zero. 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). 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. 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. d. U.S. House of Representatives, Committee on Ways and Means. For example, the actuary may expect a plan to terminate when the owner retires, or a frozen plan to terminate when assets are sufficient to provide all accumulated plan benefits. South Dakota Codified Laws 3-12C-1502 (2022) - Interest rate Eight comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. Projected returns should be reduced by any outflows associated with generating those returns. The actuary should develop a reasonable economic assumption based on the actuarys estimate of future experience, the actuarys observation of the estimates inherent in market data, or a combination thereof. Challenges for the UK pension system: the case for a pensions review Consider removing one of your current favorites in order to to add a new one. 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). 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. The discount rate is the most significant economic assumption used to calculate a plan's liability. The Pension Task Force provided its report to the ASB in February 2016. 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! 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. On an annual basis, at minimum, the board shall establish an interest rate assumption upon which the provisions of subsequent supplemental pension contracts shall be based. In these cases, we believe there is no change in methodology because the methodology in use continues to be based on a cash flow matching approach. The type and quality of bonds in the hypothetical portfolio may depend on the particular type of market-consistent measurement. Much of the debate centered on the economic assumptions actuaries use to measure these obligations. WTW Pension 100: Year-end 2019 disclosures of funding, discount rates f. Cash Flow TimingThe timing of expected contributions and benefit payments may affect the plans liquidity needs and investment opportunities. 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%. 35 and economic assumptions selected in accordance with this standard) such that the combined effect of the assumptions selected by the actuary is expected to have no significant bias (i.e., it is not significantly optimistic or pessimistic) except when provisions for adverse deviation are included or when alternative assumptions are used for the assessment of risk, in accordance with ASOP No. Financial Reporting Considerations Related to Pension and Other If a conflict exists between this standard and applicable law, the actuary should comply with applicable law. A discount rate may be a single rate or a series of rates, such as a yield curve. If the actuary determines that the guidance in this standard conflicts with ASOP Nos. Coates, Crow: Much more to be done on state retirement system reforms 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. For example, the actuary may have decided not to make any assumption with regard to four different types of future events, each of which alone is immaterial. To evaluate relevant data, the actuary should review appropriate recent and long-term historical economic data. This document contains a revision of ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations. When reviewing available plan-sponsor-specific compensation data, the actuary should take into account the credibility of these data. The actuary should take into account the balance between refined economic assumptions and materiality. 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. Examples of multiple compensation increase assumptions include the following: a. Assumed discount rates are used in measurements of the projected, accumulated, and vested benefit obligations and the service and interest cost components of net periodic pension cost. Similarly, if investment management fees are charged against the actual return on assets, such outflows should be included in the expected return projection. 41, Actuarial Communications, an assumption may be selected by the actuary or selected by another party. 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. Additionally, interest rates have hit all-time lows, diminishing expectations for returns on fixed-income investments, such as bonds. 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. 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. Consumer Price Index. The actuary should take into account the purpose of the measurement as a primary factor in selecting a discount rate. Under this approach, the percentage of total plan assets of each component of the plan asset mix is multiplied by the expected asset return for that component. Do we really need an experience study? - Buck | Buck Under this policy a portion of the excess returns will continue to be smoothed over a five year period, and some of the excess return will be immediately recognized to offset the increase in contributions. 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. General economic inflation, defined as price changes over the whole of the economy. Principal value Total interest. 2019 - 2023 PwC. A discount rate is used to calculate the present value of expected future plan payments. The Division, under the Council's supervision, is one of the largest U.S. pension fund managers in the United States. The Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. The ASB voted in June 2020 to adopt this standard. All assumptions for the largest plans are reviewed with the Board of Actuaries. The discount rate is currently equal to the expected rate of return on investment based on historic al rates. Over 50 comment letters were received covering a wide variety of potential ASB actions. 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.). 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. 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. The last revision of ASOP No. Distribution of Latest Real Return Assumptions Cheiron Survey of California Systems. The assumed rate of return should always fall within the range of reasonable assumptions. This content is copyright protected. 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. We believe, however, that it may be acceptable for employers to consider probable changes in the portfolio mix (e.g., to bring it back in line with the target mix or to align with a new target mix), provided the changes will occur in a reasonable period of time and have been approved by the appropriate level of management. The actuary should also include a disclosure of any explicit adjustment made in accordance with section 3.5.1 for adverse deviation or plan provisions that are difficult to measure. The disclosure may be brief but should be pertinent to the plans circumstances. Interest rate assumption--Suspension of new supplemental pension contracts--No right to particular price. h. Expected Plan TerminationIn some situations, the actuary may expect the plan to be terminated at a determinable date. 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 . For example, an OPEB life insurance plan may define the amount of death benefit to be received based on the employee's average or final level of annual compensation. A downward adjustment to the yield of the index to reflect the removal of the effect of call features of callable bonds in the index, if necessary. In a recently released Issue Brief, the Academy of Actuaries discusses the interplay of the rate of return assumption and the investment mix.Focusing on the long-term return rate assumption for defined benefit pension plans, a familiar idiom comes to mind: "Don't let the tail wag the dog." Throughout this standard, any reference to selecting economic assumptions also includes giving advice on selecting economic assumptions. The actuary should apply professional judgment in determining whether, given the purpose of the measurement, the payroll growth assumption should be based on a closed or open group and, if the latter, whether the size of that group should be expected to increase, decrease, or remain constant. The actuary may use a discount rate that reflects the anticipated investment return from the pension fund. Estimates suggest state-managed public pension systems likely added over $200 billion in additional pension debt in 2020. endstream endobj 1789 0 obj <>/Metadata 110 0 R/Pages 1786 0 R/StructTreeRoot 298 0 R/Type/Catalog/ViewerPreferences 1809 0 R>> endobj 1790 0 obj <>/MediaBox[0 0 612 792]/Parent 1786 0 R/Resources<>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI]/XObject<>>>/Rotate 0/StructParents 0/Tabs/S/Type/Page>> endobj 1791 0 obj <>stream 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. Interest rate information for selected Treasury securities. Compensation PracticeThe plan sponsors current compensation practice and any contemplated changes may affect the compensation increase assumption, at least in the short term. a. Kellison, Stephen G. The Theory of Interest. . The average change differs statistically from zero for most . Section 3.6, Select a Reasonable Assumption, was clarified to acknowledge that relevant historical data may not exist. Under ASC 715, the expected return on assets is a component of the employee benefit cost. Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. %%EOF Low return (5 per cent) pension projection = a poor retirement income. 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. 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. All assumptions should reflect consistent expectations of future economic conditions, such as future rates of inflation. Pension Debt Grows as Public Pension Systems Post Low Investment Average Public Pension Assumed Rate of Return Hits 40-Year Low . Additional changes were made to improve readability, clarity, or consistency within this ASOP and ASOP No. Social Security Bulletin. 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. The actuary should select assumptions (both demographic assumptions selected in accordance with ASOP No. The investment return assumption used for Tier 3 is 7.0%.. 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. http://www.ssa.gov/policy/docs/ssb/, a. The actuary is not required to select assumptions that are consistent with assumptions not selected by the actuary. The Pension Funding Council (PFC) adopts economic assumptions for all plans/systems, except LEOFF 2 which are adopted by their Board; these assumptions are then subject to revision by the Legislature. 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.