Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. The Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. 1821 0 obj <>stream If the dollar-denominated caps are based on the results of collective bargaining with a labor union, there is a general presumption under. In addition, the actuary should refer to ASOP No. http://www.cbo.gov/publication/43907. 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. In a pension plan context, it is the discount rate that equates future . Historically, actuaries have used various practices for selecting economic assumptions. The items listed above, as well as other market observations or prices, include estimates of future experience as well as other considerations. Section 3.6, Select a Reasonable Assumption, was clarified to acknowledge that relevant historical data may not exist. hk0}E0yn&jjRC~w#gF(pNw? 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. . 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. 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. 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. The decline in the average reflects small changes across most individual plans since 2008 (Figure 1b), not large changes for only a few plans. 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. 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. The top line shows the rate of return assumed on investment in equities, with growth rates ranging from around 4 to 7 per cent. 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. An employer is required to measure its share of costs for health care services by projecting future costs. 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. <> 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 Multiple investment return rates may include the following: a. Section 3.13, Reviewing Assumptions Previously Selected by the Actuary, was added to provide additional guidance regarding the reviewing of assumptions that the actuary previously selected. d. U.S. House of Representatives, Committee on Ways and Means. . 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. Although less common, an OPEB health care plan may define the retiree's deductible or contribution based on similar criteria. The type and quality of bonds in the hypothetical portfolio may depend on the particular type of market-consistent measurement. Expected rates of return reflect the plan sponsor's outlook based on the plan's asset allocation. 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. <> The actuary should take into account factors specific to each measurement in selecting an investment return assumption. Unless otherwise noted, the section numbers and titles used in appendix 2 refer to those in the second exposure draft. When issuing an actuarial report to which this standard applies, the actuary should refer to ASOP Nos. If the ratio of Actuarial Value of Assets to Market Value of Assets is below 80% or above 120%, excess market gains will not be used to lower or buy down the rate of return, and the normal smoothing method will be applied. range, which are closer to the pre-2000 average return. Additionally, the expected long-term rate of return on plan assets is an important component when determining the net benefit cost each reporting period. Considering, quantifying, and documenting any other adjustments to the bond index yield. The present value of expected future pension payments may be calculated from the perspective of different parties, recognizing that different parties may have different measurement purposes. The actuary is not required to select assumptions that are consistent with assumptions not selected by the actuary. Accordingly, it may be more appropriate to consider forward-looking capital markets returns for the plans investments. 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. Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. Estimating the projection horizons for the expected returns. Measurements of pension obligations do not generally include individual benefit calculations, individual benefit statement estimates, or nondiscrimination testing. 2 0 obj 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 actuary may want to adjust estimates based on observations to reflect the various risk premiums and other factors (such as supply and demand for tradable bond or debt securities) that might be reflected in market pricing. All ASOPs Home Selection of Economic Assumptions for Measuring Pension Obligations, PDF Version: Download Here The rate of return should be managements "best estimate." Summary of Notable Changes from the Existing ASOP No. This relationship is especially strong for firms whose reported income is the most sensitive to pension assumptions. the Investment Return Assumption Key Points The expected investment return for a pension plan's assets is used as the discount rate for public and multiemployer pension plan valuations and is sometimes referred to as the "actuarial" rate of return. assumptions, it may be an indicator that things are shifting. The service cost component of net periodic benefit cost could be volatile from year to year as a result of using current discount rates because the changes in discount rates will immediately affect the PBO and EPBO, which is the basis for determining service cost. The second exposure draft of the proposed revision of ASOP No. . 35. For each year in which the actual rate of investment return exceeds the target rate of return, the Georgia ERS will reduce its investment return assumption by 0.1% (10 basis points) until a target rate of return assumption of 7.0% is reached.. 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 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). 5 0 obj If an economic assumption is being phased in over a period that includes multiple measurement dates, the actuary should determine the reasonableness of the economic assumption and its consistency with other assumptions as of the measurement date at which it is applied, without regard to changes to the assumption planned for future measurement dates. All rights reserved. Blue Chip Financial Forecasts. 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 Growth rate 5% per year over 35 years. Consumer Price Index. As discussed in ASOP No. 2.4 Financial assumptions when measuring the plan obligation. In some other circumstances, an additional assumption regarding an expected increase in pay in the final year of service may be used. The investment return assumption reflects the anticipated returns on the plans current and, if appropriate for the measurement, future assets. b. The investment return assumption, which includes gain-sharing, is currently 7.60%. Each member firm is a separate legal entity. 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 two most typical are (1) converting the rates from certain published bond indices from a reported semi-annual compound rate basis to an annual discount rate basis and (2) arithmetic rounding. 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. PwC. If you have any questions pertaining to any of the cookies, please contact us us_viewpoint.support@pwc.com. Welcome to Viewpoint, the new platform that replaces Inform. NY *e Rates reflect all known announced rates as of November 2022. Discount Rate: Rate used to discount the liabilities . January 5, 2021. 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. 41 for guidance related to the retention of file material other than that which is to be disclosed under section 4. 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. !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 One approach to setting the payroll growth assumption may be to reduce the compensation increase assumption by the effect of any assumed merit increases. 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. 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. Said differently, it would not be appropriate for a reporting entity to use a bond matching approach to calculate the projected benefit obligation and a disaggregated yield curve approach to determine service and interest cost in the following period. 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 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. With respect to assumptions that the actuary has not selected, other than prescribed assumptions or methods set by law, the actuarys report should identify the following, if applicable: a. any such assumption that significantly conflicts with what, in the actuarys professional judgment, is reasonable for the purpose of the measurement (section 3.14); or. Contribution BudgetingAn actuary evaluating the sufficiency of a plans contribution policy may choose among several discount rates. Recent Data, Various Indexes, and Some Historical Data. These assumptions include the discount rate and estimate of future salary and benefits levels. Discount rates dropped to historical levels in 2019. Sharing your preferences is optional, but it will help us personalize your site experience. 27, Selection of Economic Assumptions for Measuring Pension Obligations, was issued in June 2019 with a comment deadline of September 15, 2019. The main remedy when returns are this low is to increase monthly pension contributions so you can reach the income you need. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. In these situations, if per capita claims cost estimates indicate that the cap will not be reached in certain years for at least some participants, projections of future health care coverage (rather than only the dollar-defined cap) would be required for those years. Consistency is not necessarily achieved by maintaining a constant difference between one economic assumption and another. Judgment should be applied to determine whether a planned change is probable. The actuary should follow the general process described in section 3.3 to select these assumptions.
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