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. In a pension plan context, it is the discount rate that equates future . 41, section 4.4, if, in the actuarys professional judgment, the actuary has otherwise deviated materially from the guidance of this ASOP. 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 median return for state-managed plans was 27% in 2021. For example, if the benefit fund must pay taxes on its investment earnings, such taxes should be included in the projection of expected returns. The investment return assumption, which includes gain-sharing, is currently 7.60%. 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. Information regarding the constituent bonds in the related bond index. The actuary should take into account the balance between refined economic assumptions and materiality. Last Revised: June 2020 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. 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. Public Pensions' Assumed Rate of Return Falls Below 7% 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. Low return (5 per cent) pension projection = a poor retirement income. The second exposure draft was issued in June 2019 with a comment deadline of September 15, 2019. 5 0 obj 27, Selection of Economic Assumptions for Measuring Pension Obligations, was issued in June 2019 with a comment deadline of September 15, 2019. Figure PEB 2-1 illustrates the calculation of the expected long-term rate of return using a weighted average approach. Communications and Disclosures, 4.1 Required Disclosures in an Actuarial Report, 4.2 Disclosure about Assumptions Not Selected by the Actuary, Appendix 1Background and Current Practices, Appendix 2Comments on the Second Exposure Draft and Responses, Actuarial Standards-Setting Process Flowchart, https://www.census.gov/library/publications/time-series/statistical_abstracts.html, http://www.federalreserve.gov/releases/h15/. Please seewww.pwc.com/structurefor further details. 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. Please see appendix 2 for a detailed discussion of the comments received and the reviewers responses. For purposes of this appendix, the term commentator may refer to more than one person associated with a particular comment letter. 2.4 Financial assumptions when measuring the plan obligation - PwC Actuaries practicing in this area are becoming accustomed to changing assumptions frequently. 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. Growth rate 5% per year over 35 years. Competitive FactorsThe level and pattern of future compensation changes may be affected by competitive factors, including competition for employees both within the plan sponsors industry and within the geographical areas in which the plan sponsor operates, and global price competition. The objective in determining an appropriate discount rate using a bond-matching approach is to match cash flows of the plan to principal redemptions on zero coupon bonds. The trouble with pension projections | Financial Times e. Expenses Paid from Plan AssetsInvestment and other administrative expenses may be paid from plan assets. The investment return assumption reflects the anticipated returns on the plans current and, if appropriate for the measurement, future assets. 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. 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 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. The investment return assumption used for Tier 3 is 7.0%.. jlT?tuuPpD\"?H w1c4i&hpd6JA&0 )))(]P~CU*!MMMd*^pHWiLQsD9BWVV&%%9/nD3##6qByy9waUh^Wi6r5@)Ugggg^^^p . Once the published yield is adjusted based on the considerations listed above, it is acceptable to round to the next 25 basis point interval, if the employer's policy is to do so. endobj In February 2022 theMERSBoard adopted a dedicated gains policy for systematically reducing the investment return assumption when actual investmentreturnsexceed the plan's current assumed rate of return. <> 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. The expected long-term rate of returnon plan assets is determined as of the measurement date and should reflect the average rate of return expected to be earned on the funds invested over the period until the benefits are expected to be paid. The actuary should not give undue weight to recent experience. The discount rate is the most significant economic assumption used to calculate a plan's liability. 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. %%EOF When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. 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. Examples of how the actuary may observe estimates inherent in market data include the following: a. comparing yields on inflation-indexed bonds to yields on equivalent non- inflation-indexed bonds as a part of estimating the markets expectation of future inflation; b. comparing yields on bonds of different credit quality to determine market credit spreads; c. observing yields on U.S. Treasury debt of various maturities to determine a yield curve free of credit risk; and. 27 adopted September 2013 are summarized below. The degree of such documentation should be based on the professional judgment of the actuary and may vary with the complexity and purpose of the actuarial services. 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. Investment Rate of Return (Discount Rate) The FY 2021 investment rate of return, as reported by the PICM is 33.55%. The assumed rate of return should always fall within the range of reasonable assumptions. Alternatively, the actuary may be in an advisory position, helping the legislative body, plan sponsor, or governing board of trustees select the assumptions. The rates of change in a groups compensation attributable to the change in the real value of goods or services per unit of work. 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. 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. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. The official version of an ASOP is as set forth in the PDF version of the ASOP, which may be downloaded from this site. Expected rates of return. Deterministic vs. Stochastic models: A guide to forecasting for pension Selection of Economic Assumptions for Measuring Pension Obligations 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." 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. The actuary may assume multiple investment return rates in lieu of a single investment return rate. e. select a reasonable assumption (section 3.6). State Pension Funds Reduce Assumed Rates of Return In certain circumstances, such as a temporary reduction or freeze in compensation, the compensation increase assumption may be negative or zero. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. . 25, Credibility Procedures, for additional guidance. This content is copyright protected. 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. Additional changes were made to improve readability, clarity, or consistency within this ASOP and ASOP No. 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. In addition, the actuary should consider whether an experience study should be performed; however, the actuary is not required to perform an experience study. 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.

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