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 a prescribed assumption or method set by another party. 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. However, the effect of omitting assumptions for all four types of future events may be a material understatement or overstatement of the measurement results. http://greenbook-waysandmeans.house.gov/ The actuary may use multiple compensation increase assumptions in lieu of a single compensation increase assumption. Please see www.pwc.com/structure for further details. So it will never be reduced beyond the bottom of the range. Discount Rate: Rate used to discount the liabilities . Pension obligation values incorporate assumptions about pension payment commencement, duration, and amount. resulting real rate of return assumption. 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. A discount rate is used to calculate the present value of expected future plan payments. These disclosures may be brief but should be pertinent to the plans circumstances. In addition, the actuary should consider whether an experience study should be performed; however, the actuary is not required to perform an experience study. Compound frequency. Blue Chip Financial Forecasts. . 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. 41, section 4.4, if, in the actuarys professional judgment, the actuary has otherwise deviated materially from the guidance of this ASOP. The items listed above, as well as other market observations or prices, include estimates of future experience as well as other considerations. Some of these assumptions are economic assumptions covered under this ASOP, and some are noneconomic assumptions covered under ASOP No. 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. 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. 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. c. U.S. Federal Reserve Weekly Statistical Release H.15. For example, the actuary may disclose any specific approaches used, sources of external advice, and how past experience and future expectations were considered in determining the assumption to be reasonable. 1788 0 obj <> endobj In such plans, the untimely liquidation of securities at depressed values may be required to meet benefit obligations. It is generally inappropriate to use the yield on a single issuers bond as the discount rate even if it is of equal duration and sufficient magnitude to the benefit obligation. Depending on a particular measurements circumstances, the actuary may disclose information about specific interrelationships among the assumptions (for example, investment return: x% per year, net of investment expenses and including inflation at y%). 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. Document Number: 197 c. materiality of the assumption to the measurement (see section 3.5.2). Compensation PracticeThe plan sponsors current compensation practice and any contemplated changes may affect the compensation increase assumption, at least in the short term. Eighteen comment letters were received and considered in making changes that were reflected in the second exposure draft. Ifthecurrent assumed rate of return is below the mid-pointin the range, half of the excess gains will be used to lower the assumption. b. endstream endobj startxref Section 1. endobj The actuary should identify the types of economic assumptions to use for a specific measurement. 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. In addition to the demographic and actuarial/economic assumptions discussed in the previous section, pension and OPEB plans require financial assumptions to be made to value the plan obligations. Other investment risks may also be present, such as default risk or the risk of bankruptcy of the issuer. 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. i. 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. 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. The footnotes at the bottom of the page, which reflect additional explanations, qualifications, and scheduled future developments for certain plans, are a critical component of this data set. d. U.S. House of Representatives, Committee on Ways and Means. Statistical Abstract of the United States. Similarly, if investment management fees are charged against the actual return on assets, such outflows should be included in the expected return projection. The period subsequent to the measurement date during which a particular economic assumption will apply in a given measurement. One approach to setting the payroll growth assumption may be to reduce the compensation increase assumption by the effect of any assumed merit increases. 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. The actuary should evaluate appropriate inflation data. Unless the measurement period is short, the actuary should not give undue weight to short-term patterns. 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. The PBO and APBO will also be immediately affected by discount rate changes. The preceding paragraph permits an employer to look to rates of return on high-quality fixed-income investments in determining assumed discount rates. stream PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Interest rate assumption--Suspension of new supplemental pension contracts--No right to particular price. !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 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. 9 Even if investments fall short of the long-term return assumption, the amount set aside for each retiree should be enough to pay for the base benefit without . ); (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. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. 41, Actuarial Communications, an assumption may be selected by the actuary or selected by another party. Thus, subsequent to the mergers, companies served by those actuarial firms have access to new discount rate methodologies. 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. The last revision of ASOP No. 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. Consumer Price Index. The rate selected from the index or indices, as well as the adjustments made to that rate, should be supported. This assumption is typically constructed by considering various factors including, but not limited to, the time value of money; inflation and inflation risk; illiquidity; credit risk; macroeconomic conditions; and growth in earnings, dividends, and rents. The actuary may use stochastic simulation models or other analyses to develop expected investment returns from this statistical data. 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. Principal value Total interest. b. Actuarial Standards Board (1996) states that "generally, the appropriate discount rate is the same as . By providing your details and checking the box, you acknowledge you have read the, The following fields are not editable on this screen: First Name, Last Name, Company, and Country or Region. Assumptions such as compensation increases or cash balance crediting rates are often used to determine projected benefit streams for valuation purposes. Different plans . As expected, there is a positive . 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. http://www.federalreserve.gov/releases/h15/