f. Cash Flow TimingThe timing of expected contributions and benefit payments may affect the plans liquidity needs and investment opportunities. 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. State Public Pension Fund Returns Expected to Decline 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. Accordingly, it may be more appropriate to consider forward-looking capital markets returns for the plans investments. 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. Capital Publications, Inc., P.O. The actuary should also review recent gain and loss analyses, if any. ASC 715-60-35-79 and 35- 80 outline similar requirements for the selection of assumptions for other post-retirement employee benefit (OPEB) plans. 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. The discount rate used to determine the FY 2022/2023funding requirement is 7.25%, which is net of gain-sharing. The rate shown applies to the plans Non-Hazardous plan, which accounts for more than 90 percent of the Kentucky ERS plan liabilities. The actuary may also take into account historical and current statistical data showing standard deviations, correlations, and other statistical measures related to historical or future expected returns of each asset class and to inflation. 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 . j. 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). 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. 27 Adopted September 2013. Notable changes from the existing ASOP No. 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. endobj The Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. PDF Used for ASC 715 Purposes - Deloitte c. Stocks, Bonds, Bills, and Inflation (SBBI). Other investment risks may also be present, such as default risk or the risk of bankruptcy of the issuer. In the public plan arena, many entities perform assumption reviews every few years, and these reviews may or may not lead to assumption adjustments. NASRA Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. 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. Such factors may include the following: a. Among the 131 plans that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020. Nothing in this standard is intended to require the actuary to select an economic assumption that has otherwise been selected by another party. Green Book: Background Material and Data on Programs within the Jurisdiction of the Committee. The Division, under the Council's supervision, is one of the largest U.S. pension fund managers in the United States. Ifthecurrent assumed rate of return is below the mid-pointin the range, half of the excess gains will be used to lower the assumption. 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. Companies must also disclose other economic assumptions: the expected rate of return on plan assets, the expected rate of salary increases, The assumed long-term inflation assumption underlying the expected rate of return should be consistent with the inflation assumption underlying the salary increase and discount rate assumptions. % If the general level of interest rates rises or declines, the assumed discount rates shall change in a similar manner. Coates, Crow: Much more to be done on state retirement system reforms We use cookies to personalize content and to provide you with an improved user experience. 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. 25, Credibility Procedures, for additional guidance. 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. Unless otherwise noted, the section numbers and titles used in appendix 2 refer to those in the second exposure draft. Summarized here are the significant issues and questions contained in the comment letters and the responses to each. Eighteen comment letters were received and considered in making changes that were reflected in the second exposure draft. 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. Blue Chip Financial Forecasts. resulting real rate of return assumption. endobj For pay-related plans, the calculation of the benefit obligation would reflect expected compensation levels, including changes attributable to inflation, seniority, promotion, and other factors. For example, the present value of expected future payments could be calculated from the perspective of an outside creditor or the entity responsible for funding the plan. paragraph 28). So it will never be reduced beyond the bottom of the range. 27, Selection of Economic Assumptions for Measuring Pension Obligations. For example, the assumed rate of investment return for the pension plans was 7 percent for . 3 0 obj The Pension Fund supports the retirement plans of over 815,000 members in seven public pension systems: the Consolidated Police & Firemen's Pension Fund, the Judicial Retirement System . 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. 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. Whether the assumed rate of return is lowered, and the magnitude of any reduction, depends on the excess gains available and the most recent range of reasonable economic assumptions as provided byMERS' consulting actuary. 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. Different plans . Similarly, if investment management fees are charged against the actual return on assets, such outflows should be included in the expected return projection. 1 Assumption changesprimarily states lowering the assumed rate of return used to calculate pension costsaccounted for another $138 billion in increased . National Association of State Retirement Administrators. PDF American Academy of Actuaries Pension Practice Council Contribution BudgetingAn actuary evaluating the sufficiency of a plans contribution policy may choose among several discount rates. range, which are closer to the pre-2000 average return. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Determining the best estimate. The top line shows the rate of return assumed on investment in equities, with growth rates ranging from around 4 to 7 per cent. 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. 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 rate selected from the index or indices, as well as the adjustments made to that rate, should be supported. Financial Reporting Considerations Related to Pension and Other Social Security Bulletin. In the private single employer plan arena, the IRS, PBGC, and FASB have promulgated rulings that have limited or effectively removed an actuarys judgment regarding the discount rate used for current-year funding or accounting. Eight comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. ]7S[A HY7>hlS*M 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 Public Pension Investment Performance Has Historically Fallen Short of PwC. The average change differs statistically from zero for most . Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. Specific expertise may be needed to compute and support an appropriate adjustment. 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. The ASB thanks everyone who took the time to contribute comments and suggestions on the exposure drafts. The focus on solvency in the private single-employer plan arena has come along with prescribed economic assumptions that are linked to capital market indices. Historically, actuaries have used various practices for selecting economic assumptions. Growth rate 5% per year over 35 years. Supporting Information Actuarial Assumptions - Washington 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 discount rate is the most significant economic assumption used to calculate a plan's liability. Throughout this standard, any reference to selecting economic assumptions also includes giving advice on selecting economic assumptions. Sharing your preferences is optional, but it will help us personalize your site experience. 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. You are already signed in on another browser or device. xWMo8\ f%E|.wc7URu,wHIIi73\^/JxvzZ:Mlq\-e^>|/G~.(9$H:u>}yl>M? Chicago, IL: Ibbotson Associates. For these plans, the employer would measure its obligation for all years in which the cap is expected to be operative by estimating the future dollar amount of the annual cap. 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. d. historical national wage increases and productivity growth. In doing so, the actuary should take into account the following: b. the characteristics of the obligation to be measured (such as measurement period, pattern of plan payments over time, open or closed group, materiality, and volatility); and. Economic assumptions have a significant effect on any pension obligation measurement. The terms below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP. In some other circumstances, an additional assumption regarding an expected increase in pay in the final year of service may be used. b. For example, if pension benefits are a function of base compensation and the plan sponsor is changing its compensation practice to put greater emphasis on incentive compensation, future growth in base compensation may differ from historical patterns. 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 the actuary determines that the guidance in this standard conflicts with ASOP Nos.