4 Thus, subsequent to the mergers, companies served by those actuarial firms have access to new discount rate methodologies. 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. Consumer Price Index. <>>> The rates of change in an individuals compensation attributable to personal performance, promotion, seniority, or other individual factors. In 5 years, you'll have $11,000. Discount Rate: Rate used to discount the liabilities . Similarly, if the assumed rate of return exceeds the top of the range, MERS will reduce the assumption so that it falls within the high end of the range. March and October issues contain long-range forecasts for interest rates and inflation. Public Pension Investment Performance Has Historically Fallen Short of Despite beating investment return targets by 20% in 2021, many public pension plans are now taking the opportunity to reduce their investment risks by lowering investment return rate assumptions to more realistic long-term growth rates. Consistency is not necessarily achieved by maintaining a constant difference between one economic assumption and another. The actuary may advise the plan sponsor about the selection of the discount rate. Considering, quantifying, and documenting any other adjustments to the bond index yield. The decade also saw the emergence of a financial economic viewpoint on pension obligations. Considering the inflation component. 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. c. materiality of the assumption to the measurement (see section 3.5.2). 27 Adopted September 2013. Notable changes from the existing ASOP No. An employer is required to measure its share of costs for health care services by projecting future costs. The period subsequent to the measurement date during which a particular economic assumption will apply in a given measurement. The investment return assumption used for Tier 3 is 7.0%.. One approach to setting the payroll growth assumption may be to reduce the compensation increase assumption by the effect of any assumed merit increases. In addition, the actuary should consider whether an experience study should be performed; however, the actuary is not required to perform an experience study. The type and quality of bonds in the hypothetical portfolio may depend on the particular type of market-consistent measurement. endobj 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. endobj The assumption used to measure the anticipated year-to-year change in compensation is referred to as the compensation increase assumption. %%EOF The trouble with pension projections | Financial Times Pension Assumptions and Earnings Manipulation | NBER 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. 41 for communication and disclosure requirements regarding changes in circumstances known to the actuary that occur after the measurement date and that would affect economic assumptions selected as of the measurement date. In certain circumstances, such as a temporary reduction or freeze in compensation, the compensation increase assumption may be negative or zero. The State Pension Funding Gap: 2016 | The Pew Charitable Trusts 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. Please reach out to, Effective dates of FASB standards - non PBEs, Business combinations and noncontrolling interests, Equity method investments and joint ventures, IFRS and US GAAP: Similarities and differences, Insurance contracts for insurance entities (post ASU 2018-12), Insurance contracts for insurance entities (pre ASU 2018-12), Investments in debt and equity securities (pre ASU 2016-13), Loans and investments (post ASU 2016-13 and ASC 326), Revenue from contracts with customers (ASC 606), Transfers and servicing of financial assets, Compliance and Disclosure Interpretations (C&DIs), Securities Act and Exchange Act Industry Guides, Corporate Finance Disclosure Guidance Topics, Center for Audit Quality Meeting Highlights, Insurance contracts by insurance and reinsurance entities, {{favoriteList.country}} {{favoriteList.content}}, An upward adjustment to certain published bond indices to restate them from a semi-annual coupon basis to an annual discount rate basis (some indices are already annualized). 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. The median return for state-managed plans was 27% in 2021. Also, some actuarial cost methods take into account the present value of future compensation. In addition, the actuary should refer to ASOP No. These assumptions include the discount rate and estimate of future salary and benefits levels. c. Collective BargainingThe collective bargaining process impacts the level and pattern of compensation changes. But many pensions have annual investment return assumptions in the 7-8% p.a. Key Characteristics Valuations measure the long term and do not directly reflect risk- This increase in debt impacting almost every pension plan in the country is primarily a result of investment return rates failing to meet overly optimistic investment return assumptions set by pension systems. As you can see, changing the annual average pension growth rate . endobj 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. Consider removing one of your current favorites in order to to add a new one. As such, when a payroll growth assumption is needed, the actuary should use an assumption that is consistent with but typically not identical to the compensation increase assumption. 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. 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. Expected rates of return reflect the plan sponsor's outlook based on the plan's asset allocation. Figure 6 clearly illustrates that the returns assumptions used in the Pensions Commission modelling are no longer applicable - the real rates of return assumed by the Pensions Commission were 2.5 percentage points (ppt) higher for government bonds, 2.4 ppt higher for corporate bonds and 2.0 ppt higher for equity markets than PwC's latest . ]7S[A HY7>hlS*M 4 or 6, ASOP Nos. 0 UksyqOiiXdQN~[n:)Kp. Section 3.6.3, Combined Effect of Assumptions, was added to provide guidance regarding the combined effect of assumptions. As discussed in ASOP No. b. The rate shown applies to the plans Non-Hazardous plan, which accounts for more than 90 percent of the Kentucky ERS plan liabilities. Only in those years in which the cap is not expected to be reached would the employer's obligation need to be calculated by making projections of future per capita health care costs. Last Revised: June 2020 The actuary may also take into account historical and current statistical data showing standard deviations, correlations, and other statistical measures related to historical or future expected returns of each asset class and to inflation. 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. C`dEV-SC"8iAvWWtt7y} 7dgR VZm8U-6'`w3LG =! 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. 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. PDF 2022 Florida Local Government Retirement Systems Actuarial Fact Sheet Compensation PracticeThe plan sponsors current compensation practice and any contemplated changes may affect the compensation increase assumption, at least in the short term. The objective of selecting assumed discount rates using that method is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the pension benefits when due. 27. 41, Actuarial Communications, an assumption may be selected by the actuary or selected by another party. ` U National Association of State Retirement Administrators. Those changes are classified as actuarial gains or losses. 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. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. 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. Expected rates of return. The conversion factors may be variable (for example, recalculated each year based on a stated mortality table and interest rate equal to the yield on 30-year Treasury bonds). . Contribution BudgetingAn actuary evaluating the sufficiency of a plans contribution policy may choose among several discount rates. 3 0 obj PDF 03/31/23 04:44 pm PENSIONS SL/LD H3100.S3162-DE1 Economic assumptions pertain to such factors as the rate of wage growth and the future expected investment return on the fund's assets. 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. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. The weighted average of the assumed discount rates disclosed for OPEB may be different from the ones disclosed for pensions due to the effect of the differences in the expected timing of cash outflows of each plan. The outside creditor may desire a discount rate consistent with other measurements of importance to the creditor even though those other measurements may have little or no importance to the entity funding the plan. 27, Selection of Economic Assumptions for Measuring Pension Obligations, was issued in June 2019 with a comment deadline of September 15, 2019. 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. Pension Debt Grows as Public Pension Systems Post Low Investment 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. Section 3.15, Phase-In of Changes in Assumptions, was added to provide guidance regarding the phase-in of changes in assumptions. 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. d. historical national wage increases and productivity growth. 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. c. Stocks, Bonds, Bills, and Inflation (SBBI). 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 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. All assumptions should reflect consistent expectations of future economic conditions, such as future rates of inflation. 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. The Chair also reminded the Board that the actuary performs an experience study every five years, so this issue will be revisited. 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 . The actuary should consider preparing and retaining documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. i. PDF Pension Valuation Methods and Assumptions - Society of Actuaries 3-12C-1502. A change in facts and circumstances may, however, warrant a change in the approach for determining the discount rate. After identifying the types of economic assumptions to be used for the measurement, the actuary should follow the general process set forth below for selecting each economic assumption for a specific measurement: a. identify components, if any, of the assumption; c. take into account factors specific to the measurement; d. take into account other general considerations, when applicable (section 3.5); and. 27, Selection of Economic Assumptions for Measuring Pension Obligations. The lower expected rates of return assumptions in almost all the developed countries for 2020 could possibly be attributed to a more conservative stand by pension sponsors regarding the fixed income and equity markets returns in the future. 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). 25, Credibility Procedures, for additional guidance. hk0}E0yn&jjRC~w#gF(pNw? 1788 0 obj <> endobj . Notable Changes from the Second Exposure Draft. The actuary should take into account factors specific to each measurement in selecting a specific compensation increase assumption. Under ASC 715, the expected return on assets is a component of the employee benefit cost. 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. 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. 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. Many actuaries change assumptions infrequently, while other actuaries reevaluate the assumptions as of each measurement date and change economic assumptions more frequently. Under a benchmark approach, entities start with a rate from a published bond index and make certain adjustments, either upward or downward, to reflect the individual facts and circumstances of their plans. b. U.S. Department of Labor, Bureau of Labor Statistics. 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. 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. 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. Rates reflect all known announced rates as of November 2022. When assuming select and ultimate investment return rates, the actuary should consider reflecting the relationships among inflation, interest rates, and market appreciation or depreciation. Supporting Information Actuarial Assumptions - Washington If the actuary determines that the guidance in this standard conflicts with ASOP Nos. The forecast projects three-month Treasury Bill rates, 10-year Treasury Note rates, CPI-U, gross domestic product, and unemployment rates. Although there is some latitude regarding the methodology that may be selected to determine the discount rate, the approach selected should be followed consistently. Compensation is a factor in determining participants benefits in many pension plans. The assumptions used to measure the pension obligation are the responsibility of management. the investment return assumption that would apply to each of the State's pension plans. The actuary is not required to select assumptions that are consistent with assumptions not selected by the actuary. Contributions expected to be made in future years should not be considered in determining the expected long-term rate of return on plan assets. When issuing an actuarial report to which this standard applies, the actuary should refer to ASOP Nos. Interest rate information for selected Treasury securities. Section 3.14, Assessing Assumptions Not Selected by the Actuary, replaced previous section 3.13, Prescribed Assumption(s), and was expanded to provide additional guidance regarding assessing assumptions not selected by the actuary. https://www.census.gov/library/publications/time-series/statistical_abstracts.html 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. 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). Alternatively, the actuary may use a discount rate appropriate for defeasance, settlement, or market-consistent measurements. j. Two key takeaways from this data are that a) a lower assumed rate of inflation . The disclosure may be brief but should be pertinent to the plans circumstances. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 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. IoD b. PDF NASRA Issue Brief endobj . Section 3.8.3(j), Forward-Looking Expected Investment Returns, was modified to delete the educational material on forward-looking expected geometric and arithmetic returns. The average change differs statistically from zero for most . In July 2015, the ASB held a public hearing on actuarial standards of practice applicable to actuarial work regarding public plans. Ifthecurrent assumed rate of return is below the mid-pointin the range, half of the excess gains will be used to lower the assumption. Calculate. Cost of living latest: Aldi and Lidl branching into new neighbourhood 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. The actuarys report should state the source of any assumption that the actuary has not selected. 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). 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. Social Security Bulletin. Blue Chip Financial Forecasts. a. Kellison, Stephen G. The Theory of Interest. It is not appropriate to make a change solely for the purpose of achieving a higher discount rate or avoiding a change in the assumed discount rate. ASC 715-60-35-79 and 35- 80 outline similar requirements for the selection of assumptions for other post-retirement employee benefit (OPEB) plans. If the actuary learns of an event occurring after the measurement date that would have changed the actuarys selection of an economic assumption, the actuary may reflect this change as of the measurement date. e. Expenses Paid from Plan AssetsInvestment and other administrative expenses may be paid from plan assets. 27 was issued in September 2013. 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. Pension obligation values incorporate assumptions about pension payment commencement, duration, and amount. Low return (5 per cent) pension projection = a poor retirement income. 35. Projected retirement income = 7,000 p.a. The terms below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP. Document Status: Adopted.

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