<>>> 3 0 obj b. the disclosure in ASOP No. 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. If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority) or for any other reason the actuary deems appropriate, the actuary should refer to section 4. Social Security Bulletin. 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. ;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 1808 0 obj <>/Filter/FlateDecode/ID[<0FC03EDF62553D4A8A030D5571DD2A9D><7EEB412E3DEEBC40A90A14EB8C7F9691>]/Index[1788 34]/Info 1787 0 R/Length 108/Prev 706949/Root 1789 0 R/Size 1822/Type/XRef/W[1 3 1]>>stream 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 . ); (iii) a stationary or dynamic target allocation of plan assets among different classes of securities; and (iv) permissible ranges for each asset class within which the investment manager is authorized to make investment decisions. 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. As expected, there is a positive . 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. As expected, there is a positive correlation between expected rate of return and the amount of plan assets 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. . The average change differs statistically from zero for most . Key Characteristics Valuations measure the long term and do not directly reflect risk- 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. b. 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. Among the 131 funds that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020 as . In addition, the actuary should consider whether an experience study should be performed; however, the actuary is not required to perform an experience study. Considering the inflation component. Funding valuations for these types of plans often use a discount rate related to the expected return on plan assets. All ASOPs Home Selection of Economic Assumptions for Measuring Pension Obligations, PDF Version: Download Here 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. The discount rate is the most significant economic assumption used to calculate a plan's liability. But many pensions have annual investment return assumptions in the 7-8% p.a. In the public plan arena, many entities perform assumption reviews every few years, and these reviews may or may not lead to assumption adjustments. The forecast projects three-month Treasury Bill rates, 10-year Treasury Note rates, CPI-U, gross domestic product, and unemployment rates. 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. c. Stocks, Bonds, Bills, and Inflation (SBBI). 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). Those rates shall be extrapolated from the existing yield curve at the measurement date. 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. 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. 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. Growth rate 5% per year over 35 years. The actuary may advise the plan sponsor about the selection of the discount rate. This content is copyright protected. 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). As with other actuarial assumptions, projecting public pension fund investment returns requires a focus on the long-term. 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. In practice, this discount rate (return on asset) assumption may be set by the legislative body, plan sponsor, a governing board of trustees, or the actuary. . 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. It may also be an important factor for a plan of any size that provides highly subsidized early retirement benefits, lump-sum benefits, or supplemental benefits triggered by corporate restructuring or financial distress. d. examining annuity prices to estimate the market price to settle pension obligations. 4 or 6 will govern. These data may include consumer price indices, the implicit price deflator, forecasts of inflation, yields on government securities of various maturities, and yields on nominal and inflation-indexed debt. Information regarding the constituent bonds in the related bond index. 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. Nonetheless, such a change should be accompanied by a sound rationale in support of the change. Draft revisions of ASOP Nos. 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. It is used in conjunction with the market-related value of plan assets (see. The actuary should select reasonable economic assumptions. 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. In making those estimates, employers may also look to rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits. Please see appendix 2 for a detailed discussion of the comments received and the reviewers responses. 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. 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. The date as of which the values of the pension obligations and, if applicable, assets are determined. It is often called the valuation interest rate. h. Expected Plan TerminationIn some situations, the actuary may expect the plan to be terminated at a determinable date. endobj c. U.S. Federal Reserve Weekly Statistical Release H.15. Multiple investment return rates may include the following: a. [1] A discount rate is used to calculate present values of expected future payments. The year-on-year changes of expected rates of return assumptions vary even within developed countries both in . Sufficient detail should be shown to permit another qualified actuary to assess the level and pattern of each assumption. A change in facts and circumstances may, however, warrant a change in the approach for determining the discount rate. 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. 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. Topic 2: The internal rate of return concept underlying return forecasts. The actuary may use a discount rate that reflects the anticipated investment return from the pension fund. New Nyc State Comptroller Thomas P. DiNapoli today announced this the New Nyk State Common Retirement Fund's (Fund) your return what 9.51% for the declare fiscal year that ended March 31, 2022. 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. Callable bonds should not be included in any bond matching (or included using the yield to the call date). 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. The expected long-term rate of return on plan assets should generally be based on the investment portfolio that existed as of the measurement date without consideration of proposed changes to the portfolio subsequent to the measurement date. Using solely historical returns as an approximation of the rate of return may not produce an appropriate rate, particularly if the market has moved significantly in one direction in recent years. For example, actuaries working with small plans may prefer to emphasize the results of general research to comply with this standard. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. A discount rate may be a single rate or a series of rates, such as a yield curve. 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. !P3{%[4~:VMY! P(RIEr=8'B6/82AKEWm(9{UxUBkzeuzI/U2-SFOgC5B@+NlWq^;zWNe0Qh=`=[U[aN`K#xsOjPW1>Zf3[N +[ENr=pT>U9wo#-LX7{.WPiL}|DpWMpU}jGKRZT}o~4 The actuary should consider preparing and retaining documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. The assumed rate of return should always fall within the range of reasonable assumptions. Last Revised: June 2020 4 0 obj Capital Publications, Inc., P.O. 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. The actuary should identify the types of economic assumptions to use for a specific measurement. 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. the investment return assumption that would apply to each of the State's pension plans. hk0}E0yn&jjRC~w#gF(pNw? 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. You can set the default content filter to expand search across territories. In addition to inflation, investment return, discount rate, and compensation increase assumptions, other economic assumptions may be required for measuring certain pension obligations. https://www.census.gov/library/publications/time-series/statistical_abstracts.html Assumed discount rates shall be reevaluated at each measurement date. National Association of State Retirement Administrators. 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. b. 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 . The type and quality of bonds in the hypothetical portfolio may depend on the particular type of market-consistent measurement. Under these plans, the dollar-denominated cap can be fixed, increased automatically (indexed), or redetermined on an ad hoc basis. Indeed, assumed long-term rates of return are approximately 30 basis points higher for firms that are acquiring other firms. 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. The general effects of the changes should be disclosed in words or by numerical data, as appropriate. If the dollar-denominated caps are based on the results of collective bargaining with a labor union, there is a general presumption under. Distribution of Latest Real Return Assumptions Cheiron Survey of California Systems. Such factors may include the following: a. 4, 23, Data Quality, 25, 35, 41, and 51. Blue Chip Financial Forecasts. The investment return assumption reflects the anticipated returns on the plans current and, if appropriate for the measurement, future assets. Interest rate assumption--Suspension of new supplemental pension contracts--No right to particular price. We use cookies to personalize content and to provide you with an improved user experience. % Additionally, the expected long-term rate of return on plan assets is an important component when determining the net benefit cost each reporting period. 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. Congressional Budget Offices economic forecast. It is not intended to be an exhaustive list. Section 4.1.2, Rationale for Assumptions, was modified concerning the disclosure of the rationale for assumptions and was clarified concerning the application to planned assumption changes after the measurement date. The Division, under the Council's supervision, is one of the largest U.S. pension fund managers in the United States. 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. resulting real rate of return assumption. When an economic assumption is not selected by the actuary, the guidance in section 3.14 and section 4 concerning assessment and disclosure applies. The ASB voted in June 2020 to adopt this standard. Therefore, the substantive plan approach (see. For each previously selected assumption that the actuary determines is no longer reasonable, the actuary should select a reasonable new assumption. This brief discusses how investment return assumptions are established and evaluated . So it is fair to ask whether they are necessary and what an appropriate scope for review is. Interest rates (sometimes referred to as yields or yields to maturity) generally vary depending on the remaining maturity or duration of the obligation. At each measurement date, the actuary should determine whether the economic assumptions selected by the actuary for a previous measurement date continue to be reasonable. 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 discount rate used to determine the FY 2022/2023funding requirement is 7.25%, which is net of gain-sharing. c. materiality of the assumption to the measurement (see section 3.5.2). The actuary should also review recent gain and loss analyses, if any. 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 is not required to select assumptions that are consistent with assumptions not selected by the actuary. 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. stream b. U.S. Department of Labor, Bureau of Labor Statistics. Please see www.pwc.com/structure for further details. 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 . 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. For example, if an employers business is in decline and the effect of that decline is reflected in the turnover assumption, it may be appropriate to reflect a change in the retirement assumption, and it may also be appropriate to reflect a change in the compensation increase assumption. 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. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions, that relates to the selection and use of economic assumptions; c. supplements the guidance in ASOP No. One approach to setting the payroll growth assumption may be to reduce the compensation increase assumption by the effect of any assumed merit increases. Daily Monthly Annually. The rate shown applies to Tiers 1 & 2. 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. 1 0 obj 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. 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 discount rate is currently equal to the expected rate of return on investment based on historic al rates. Among the 131 plans that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020. In some circumstances, this may be accomplished by adjusting the base amount from which future compensation elements are projected (for example, the projected bonuses might be based on an adjusted average of bonuses over the last 3 years). The investment return assumption used for Tier 3 is 7.0%.. Recent Data, Various Indexes, and Some Historical Data. General economic inflation, defined as price changes over the whole of the economy. The rate shown applies to the plans Non-Hazardous plan, which accounts for more than 90 percent of the Kentucky ERS plan liabilities. 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).
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