2.3 Demographic assumptions in pension and OPEB plans, 2.5 Attribution of benefits to periods of service. In December 2014, the ASB formed the Pension Task Force and charged it with reviewing these comments and other relevant reports and input to develop recommendations for ASB next steps. Distribution of Latest Real Return Assumptions Cheiron Survey of California Systems. However, an employer's plan may have a limit or "cap" on the dollar amount of health care coverage it promises to pay. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. e. U.S. Social Security Administration. In preparing calculations for purposes other than current-year plan valuations, actuaries often use economic assumptions that are different from those used for the current-year valuation. The Arizona Public Safety Personnel Retirement System administers a plan for public safety personnel comprised of three tiers depending on participants' date of hire. Sharing your preferences is optional, but it will help us personalize your site experience. 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 average change differs statistically from zero for most . As you can see, changing the annual average pension growth rate . Such factors may include the following: a. Over 50 comment letters were received covering a wide variety of potential ASB actions. For purposes of this appendix, the term commentator may refer to more than one person associated with a particular comment letter. But many pensions have annual investment return assumptions in the 7-8% p.a. b. An employer is required to measure its share of costs for health care services by projecting future costs. If the actuary determines that the guidance in this standard conflicts with ASOP Nos. 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. This increase in debt impacting almost every pension plan in the country is primarily a result of investment return rates failing to meet overly optimistic investment return assumptions set by pension systems. Economic assumptions pertain to such factors as the rate of wage growth and the future expected investment return on the fund's assets. endstream The ASB provides guidance for measuring pension and retiree group benefit obligations through the series of ASOPs listed below. c. Separate Assumptions for Different Compensation ElementsDifferent compensation increases are assumed for two or more compensation elements that are expected to change at different rates (for example, x% bonus increases and y% increases in other compensation elements). When an economic assumption is not selected by the actuary, the guidance in section 3.14 and section 4 concerning assessment and disclosure applies. All assumptions are reviewed with the Board of Actuaries. b. U.S. Department of Labor, Bureau of Labor Statistics. The actuary should evaluate appropriate inflation data. %PDF-1.5 In developing a reasonable assumption for these factors and in combining the factors to develop the investment return assumption, the actuary may take into account a broad range of data and other inputs, including the judgment of investment professionals. Plan obligations increased by roughly 11% in 2019, mostly due to a decline in discount rates used to measure pension obligations. An internal rate of return (IRR) is the interest rate at which the net present value of all cash flows for a corporate or financial investment, including the initial investment, is equal to zero. <> The disclosure may reference any study performed, including the date of the study. xT]k@|?R >vC 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. Interest rate assumption--Suspension of new supplemental pension contracts--No right to particular price. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations. 41, section 4.4, if, in the actuarys professional judgment, the actuary has otherwise deviated materially from the guidance of this ASOP. 4 These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. The report included suggestions for changes to the ASOPs that would apply to all areas of pension practice. 41 for communication and disclosure requirements regarding changes in circumstances known to the actuary that occur after the measurement date and that would affect economic assumptions selected as of the measurement date. Therefore, the substantive plan approach (see. Welcome to Viewpoint, the new platform that replaces Inform. The actuary should also review recent gain and loss analyses, if any. The actuary may use a discount rate that reflects the anticipated investment return from the pension fund. For example, an employer may agree to bear annual costs equal to a specified dollar amount multiplied by the number of plan participants in each future year. Valuation Basis - uses all the assumptions in the plan's valuation as of the current actuarial valuation date. The actuary should take into account factors specific to each measurement in selecting a specific compensation increase assumption. 5 0 obj 4 or 6, ASOP Nos. 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 . Section 3.8.3(j), Forward-Looking Expected Investment Returns, was modified to delete the educational material on forward-looking expected geometric and arithmetic returns. In these circumstances, the assumptions should be revised. 8 0 obj 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. 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. range, which are closer to the pre-2000 average return. For example, employers that determine their discount rates by matching a plan's specific cash flows to a spot-rate yield curve or individual high-quality bonds may switch from one acceptable spot-rate yield curve to another acceptable curve, or switch from an acceptable curve to an acceptable bond match. The first decade of the 21st century contained a significant amount of debate inside and outside the actuarial profession regarding the measurement of pension obligations. Please see appendix 2 for a detailed discussion of the comments received and the reviewers responses. For an employer using a benchmark approach, the following information should be maintained or updated/re-evaluated each period to support the discount rate: A plans benefit cash flows are often such that the employers discount rate can be supported more consistently by using spot-rate yield curves or a specific bond matching approach rather than a benchmark approach. 35. 4, 23, Data Quality, 25, 35, 41, and 51. 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. Assumed rates of return on corporate bonds vary from 1 to 4 per cent . For plans other than private single-employer plans (for example, church plans, multiemployer plans, public plans), the discount rate for current-year funding requirements may or may not be prescribed by other entities. For PlannerPlus users, income taxes are estimated using all currently available state and federal tax rates and tax brackets through longevity. 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. Ifthecurrent assumed rate of return is below the mid-pointin the range, half of the excess gains will be used to lower the assumption. Draft revisions of ASOP Nos. In these cases, we believe there is no change in methodology because the methodology in use continues to be based on a cash flow matching approach. stream 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. hb```B eahd0/- n:|x)`#pF]F y! In developing this model, the actuary has assumed that interest rates will remain flat over the five-year period and that the plan's assets will experience an annual return equal to the plan sponsor's expected return on asset assumption for financial reporting under ASC 715. General economic inflation, defined as price changes over the whole of the economy. 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. Impact on FY 2023 Contributions In it, the fund's actuary projected that pension costs would likely exceed $220 million annually by 2038, eating up 32% of the T's operating revenue. These ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services. xWMo8\ f%E|.wc7URu,wHIIi73\^/JxvzZ:Mlq\-e^>|/G~.(9$H:u>}yl>M? 27, Selection of Economic Assumptions for Measuring Pension Obligations, was issued in June 2019 with a comment deadline of September 15, 2019. Actuarial Standards Board (1996) states that "generally, the appropriate discount rate is the same as . Changes in the discount rate also affect the interest cost component of net periodic benefit cost, although the effect of an increase (or decrease) in the rate will be offset to some degree by the effect of the corresponding decrease (or increase) in the PBO or APBO to which the interest rate is applied. If these rates were lowered by 1-2 percentage points, the required pension contributions taken from salaries or via taxation would increase dramatically. 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. Mergers periodically occur between certain actuarial firms that had their own proprietary methods for developing assumed discount rates. The first exposure draft was issued in March 2018 with a comment deadline of July 31, 2018. g. Benefit VolatilityBenefit volatility may be a primary factor for small plans with unpredictable benefit payment patterns. Such factors may include the following: a. 112.664(1)(b) - uses same mortality assumption as 112.664(1)(a) but using an assumed discount rate equal to 200 basis points (2.00%) less than plan's assumed rate of return. Taking into account the purpose of the measurement, materiality, and the cost of using refined assumptions, the actuary may determine that it is appropriate to apply a rounding technique to the selected economic assumption. For situations in which both the demographic assumptions and economic assumptions have changed from those previously used for the same type of measurement, the actuary may disclose the general effects of the changes separately or combined, as appropriate. 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. 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. In spite of the counterintuitive outcome, that is the economic reality of a negative interest rate environment. Eight comment letters were received and considered in making changes that are reflected in this revised ASOP. The investment return assumption, which includes gain-sharing, is currently 7.60%. In addition, the actuary should consider whether an experience study should be performed; however, the actuary is not required to perform an experience study. Section 3.16, Documentation, was added to provide guidance regarding documentation. 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. Although less common, an OPEB health care plan may define the retiree's deductible or contribution based on similar criteria. 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. 35. At each measurement date, the actuary should assess the reasonableness of each economic assumption that the actuary has not selected (other than prescribed assumptions or methods set by law or assumptions disclosed in accordance with section 4.2[b]), using the guidance set forth in this standard to the extent practicable. Additionally, the expected long-term rate of return on plan assets is an important component when determining the net benefit cost each reporting period. When selecting a compensation increase assumption, the actuary should take into account the following: The actuary should evaluate available compensation data. The date as of which the values of the pension obligations and, if applicable, assets are determined. This document contains a revision of ASOP No. http://www.cbo.gov/publication/43907. Compound frequency. 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 data below is taken from the National Association of State Retirement Administrators (NASRA) website Interest rate information for selected Treasury securities. Document Status: Adopted. Eight comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. 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. Estimates suggest state-managed public pension systems likely added over $200 billion in additional pension debt in 2020. 1 Assumption changesprimarily states lowering the assumed rate of return used to calculate pension costsaccounted for another $138 billion in increased . 41 for guidance related to the retention of file material other than that which is to be disclosed under section 4. 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. Historically, actuaries have used various practices for selecting economic assumptions. Pension obligation values incorporate assumptions about pension payment commencement, duration, and amount. 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. <> 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 . a. Kellison, Stephen G. The Theory of Interest. Minor wording or punctuation changes that are suggested but not significant are not reflected in the appendix, although they may have been adopted. Although a helpful starting point, these approaches should be carefully reviewed to assess whether they incorporate appropriate bonds and bond pricing, effectively match the specific plans expected benefit cash flow stream, and incorporate reasonable assumptions about reinvestment of excess bond cash flows and yields for bond maturities in years in which no bonds exist (e.g., beyond 30 years).
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