However, the effect of omitting assumptions for all four types of future events may be a material understatement or overstatement of the measurement results. 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. d. Compensation VolatilityIf certain elements of compensation, such as bonuses and overtime, tend to vary materially from year to year, or if aberrations exist in recent compensation amounts, then volatility should be taken into account. paragraph 28). The Pension Task Force provided its report to the ASB in February 2016. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. [,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= i. All ASOPs Home Selection of Economic Assumptions for Measuring Pension Obligations, PDF Version: Download Here ` U stream b. B. The report included suggestions for changes to the ASOPs that would apply to all areas of pension practice. In that case, the facts and circumstances of each plan will need to be assessed, including past practices and cost sharing arrangements, in order to determine the substantive plan of each employee group. The Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. peb_guide. 27. 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. 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). e. it is expected to have no significant bias (i.e., it is not significantly optimistic or pessimistic), except when provisions for adverse deviation or plan provisions that are difficult to measure are included (as discussed in section 3.5.1) or when alternative assumptions are used for the assessment of risk, in accordance with ASOP No. 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 endstream endobj 1792 0 obj <>stream <> 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'$HH1ya^e~NdrebLr|u?91'XgiruYop g,Z The cap may be defined in the aggregate for the retiree group. Select and Ultimate AssumptionsAssumed compensation increases vary by period from the measurement date (for example, x% increases for the first 5 years following the measurement date, and y% thereafter) or by age or service. When selecting a compensation increase assumption, the actuary should take into account the following: The actuary should evaluate available compensation data. hbbd```b``A$YH#"o@Q9.b? 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. j. For companies that currently utilize a yield curve approach to calculate discount rates and the projected benefit obligation, assuming management believes it produces a better estimate of their benefit costs, a change to such an approach would be treated as a change in estimate under. 2019 - 2023 PwC. In order to measure a pension obligation, the actuary will typically need to select or assess assumptions underlying the obligation. The investment return assumption, which includes gain-sharing, is currently 7.60%. 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. 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. The actuary should refer to ASOP No. 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. For example, if a pension program reduced its . For each measurement date, the actuary should reassess the individual assumptions selected by the actuary and the relationships among them, and make appropriate adjustments. The PBO and APBO will also be immediately affected by discount rate changes. Low return (5 per cent) pension projection = a poor retirement income. The actuarys report should state the source of any assumption that the actuary has not selected. c. Stocks, Bonds, Bills, and Inflation (SBBI). d. Investment Manager PerformanceAnticipating superior (or inferior) investment manager performance may be unduly optimistic (or pessimistic). PwC. We use cookies to personalize content and to provide you with an improved user experience. Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. 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. Some of these assumptions are economic assumptions covered under this ASOP, and some are noneconomic assumptions covered under ASOP No. Nothing in this standard is intended to require the actuary to select an economic assumption that has otherwise been selected by another party. 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. That compares with 14% of operating revenue . At each measurement date, the actuary should assess the reasonableness of each economic assumption that the actuary has not selected (other than prescribed assumptions or methods set by law or assumptions disclosed in accordance with section 4.2[b]), using the guidance set forth in this standard to the extent practicable. 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. The rates of change in an individuals compensation attributable to personal performance, promotion, seniority, or other individual factors. Nothing in this ASOP is intended to require the actuary to disclose confidential information. 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. ;0*TvaRUK~NU!-Jq HtkH E#|/E\D^%H+juYqB:I':IG%@&3QNZw${?Fw'm2V!fU3PBwc?52mD+h#S%|1kbb7p5~5"o-XbS GjhAN3~d&52 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. 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. https://www.census.gov/library/publications/time-series/statistical_abstracts.html 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 actuary should evaluate appropriate inflation data. Those rates shall be extrapolated from the existing yield curve at the measurement date. 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 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. The discount rate used to determine the FY 2022/2023funding requirement is 7.25%, which is net of gain-sharing. The actuary may use multiple compensation increase assumptions in lieu of a single compensation increase assumption. b. Because cash inflows would equal cash outflows in timing and amount, there would be no reinvestment risk in the yields to maturity of the portfolio. A change in facts and circumstances may, however, warrant a change in the approach for determining the discount rate. Funding valuations for these types of plans often use a discount rate related to the expected return on plan assets. 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. %PDF-1.5 Plan obligations increased by roughly 11% in 2019, mostly due to a decline in discount rates used to measure pension obligations. 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. endstream endobj startxref If high-quality corporate bonds available in the marketplace are trading at negative yields (i.e., their present value is greater than their nominal future cash flows), an employer would need to purchase an amount of bonds that exceeds the notional undiscounted future benefit payments to generate a stream of future cash flows to pay the benefits when due. 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). Statistical Abstract of the United States. ? 5 0 obj A specific assumption or method that is selected by another party, to the extent that law, regulation, or accounting standards give the other party responsibility for selecting such an assumption or method. Alternatively, the actuary may use a discount rate appropriate for defeasance, settlement, or market-consistent measurements. The official version of an ASOP is as set forth in the PDF version of the ASOP, which may be downloaded from this site. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate. Measurements of defined benefit pension plan obligations include calculations such as funding valuations or other assignment of plan costs to time periods, liability measurements or other actuarial present value calculations, and cash flow projections or other estimates of the magnitude of future plan obligations. However, they cost money and require considerable effort. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. However, it may not be appropriate to assume that future contracts will provide the same level of compensation changes as the current or recent contracts. The actuary should select reasonable economic assumptions. 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. Given the availability of other yield curve and bond-matching approaches, use of a benchmark approach to develop discount rates is increasingly uncommon. 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. Eight comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. As in the single-employer situation, the actuary may have discretion over other economic assumptions used to measure obligations for plans other than private single-employer plans. 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. Measurement purposes may include the following: a. The investment return assumption differs from the discount rate because of the effective cost of providing potential future ad hoc postretirement benefit increases, or gain-sharing. The investment return assumption used for Tier 3 is 7.0%.. The second exposure draft was issued in June 2019 with a comment deadline of September 15, 2019. 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. Accordingly, it may be more appropriate to consider forward-looking capital markets returns for the plans investments. Regardless of the approach used traditional bond matching or yield curve approach or a disaggregated yield curve approach the measurement of the projected benefit obligation and the measurement of the ensuing periods service and interest cost must be based on the same discount rate methodology. Among the 131 plans that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020. The determination of the assumed discount rate is separate from the determination of the expected rate of return on plan assets whenever the actual portfolio differs from the hypothetical portfolio described in this paragraph. Information regarding the constituent bonds in the related bond index. The median return for state-managed plans was 27% in 2021. The ASB voted in June 2020 to adopt this standard. 3 0 obj 4, 23, Data Quality, 25, 35, 41, and 51. Forward-Looking Expected Investment ReturnsIn some instances, the actuary will collect or develop forward-looking expected investment returns by asset class or for the entire portfolio. Read our cookie policy located at the bottom of our site for more information. endobj Projected value. Considering, quantifying, and documenting any negative adjustments to the bond index yield for callable bonds included in the index. For example, if $100 is owed in one year and the discount rate is 5%, then the present value of the $100 promise is $100 / (1 + 5 . 1788 0 obj <> endobj Recent Data, Various Indexes, and Some Historical Data. Discount Rate Assumption 6.00% 6.50% 7.00% 7.50% 8.00% 8.50% 9.00% 9.50% . For purposes of this appendix, the term commentator may refer to more than one person associated with a particular comment letter. It may be a single rate, it may vary by age or service, or it may vary over future years. Economic assumptions pertain to such factors as the rate of wage growth and the future expected investment return on the fund's assets. The actuary may use a discount rate that reflects the anticipated investment return from the pension fund. <>>> 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. If an entity sponsors more than one pension or postretirement benefit plan, it may be appropriate to choose different discount rates for different plans on the same measurement date because of differing average durations until benefit payments are made and differing patterns of cash flow requirements. Statistics for Employee Benefits Actuaries. The forecast projects three-month Treasury Bill rates, 10-year Treasury Note rates, CPI-U, gross domestic product, and unemployment rates. Assumptions such as compensation increases or cash balance crediting rates are often used to determine projected benefit streams for valuation purposes. In addition, the actuary should refer to ASOP No. Certain plan benefits have components directly related to the accumulation of real or hypothetical individual account balances (for example, floor-offset arrangements and cash balance plans). The actuary may use stochastic simulation models or other analyses to develop expected investment returns from this statistical data. Measurements of pension obligations do not generally include individual benefit calculations, individual benefit statement estimates, or nondiscrimination testing. 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). 35. 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 sum of those asset mix weighted expected rates of return for each component are then added together to determine the total expected rate of return. The decline in the average reflects small changes across most individual plans since 2008 (Figure 1b), not large changes for only a few plans. For PlannerPlus users, income taxes are estimated using all currently available state and federal tax rates and tax brackets through longevity. Compensation PracticeThe plan sponsors current compensation practice and any contemplated changes may affect the compensation increase assumption, at least in the short term. The disclosure may be brief but should be pertinent to the plans circumstances. Investment Rate of Return (Discount Rate) The FY 2021 investment rate of return, as reported by the PICM is 33.55%. When the actuary is responsible for selecting or giving advice on selecting economic assumptions, the actuary may incorporate economic data and analyses from a variety of other sources, including representatives of the plan sponsor and administrator, investment advisors, economists, and other professionals. The actuary should also include the following, as applicable, in an actuarial report: a. the disclosure in ASOP No. This content is copyright protected. The rates of change in a groups compensation attributable to the change in the real value of goods or services per unit of work. 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. c. historical and current investment data including, but not limited to, real and nominal returns, the inflation and inflation risk components implicit in the yield of inflation-protected securities, dividend yields, earnings yields, and real estate capitalization rates. fox theater view from my seat,

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