The decline in the average reflects small changes across most individual plans since 2008 (Figure 1b), not large changes for only a few plans. When selecting a compensation increase assumption, the actuary should take into account the following: The actuary should evaluate available compensation data. Depending on the magnitude and duration of benefit payments for a particular plan, these negative yields could meaningfully reduce the overall discount rate for a benefit plan or even lead to an overall negative discount rate, particularly for plans with primarily shorter-duration payments. The discount rate used to determine the FY 2022/2023funding requirement is 7.25%, which is net of gain-sharing. 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. Notable Changes from the Second Exposure Draft. In some circumstances, this may be accomplished by adjusting the base amount from which future compensation elements are projected (for example, the projected bonuses might be based on an adjusted average of bonuses over the last 3 years). 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions, that relates to the selection and use of economic assumptions; c. supplements the guidance in ASOP No. For small plans or recently formed plan sponsors, industry or national data may provide a more appropriate basis for developing the compensation increase assumption. The investment return assumption reflects the anticipated returns on the plans current and, if appropriate for the measurement, future assets. National Association of State Retirement Administrators. 1821 0 obj <>stream 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). The data below is taken from the National Association of State Retirement Administrators (NASRA) website Additional changes were made to improve readability, clarity, or consistency within this ASOP and ASOP No. 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. Summarized here are the significant issues and questions contained in the comment letters and the responses to each. Economic assumptions have a significant effect on any pension obligation measurement. PwC. The Pension Task Force provided its report to the ASB in February 2016. In such plans, the untimely liquidation of securities at depressed values may be required to meet benefit obligations. In July 2015, the ASB held a public hearing on actuarial standards of practice applicable to actuarial work regarding public plans. The determination of the assumed discount rate is separate from the determination of the expected rate of return on plan assets whenever the actual portfolio differs from the hypothetical portfolio described in this paragraph. The year-on-year changes of expected rates of return assumptions vary even within developed countries both in . Selection of Economic Assumptions for Measuring Pension Obligations, TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in the Selection of Economic Assumptions for Measuring Pension Obligations, SUBJ: Actuarial Standard of Practice (ASOP) No. Compensation is a factor in determining participants benefits in many pension plans. March 21, 2023 29 CA Comparison - Funded Ratio 0% 25% 50% 75% 100% The distinction between the pension liability discount rate assumption and the investment return assumption is often blurred in practice because it is assumed that they are numerically equal. The weighted average of the assumed discount rates disclosed for OPEB may be different from the ones disclosed for pensions due to the effect of the differences in the expected timing of cash outflows of each plan. Nonetheless, such a change should be accompanied by a sound rationale in support of the change. The actuarial assumptions (e.g., assumed rate of return on investments, inflation, medical expenses) are used to determine the amount of the systems' liabilities and the amount the state must pay each year to help fund the plans on an ongoing basis. Contribution BudgetingAn actuary evaluating the sufficiency of a plans contribution policy may choose among several discount rates. The employee's pension should be funded by the generation of tax payers that receives the . We believe, however, that it may be acceptable for employers to consider probable changes in the portfolio mix (e.g., to bring it back in line with the target mix or to align with a new target mix), provided the changes will occur in a reasonable period of time and have been approved by the appropriate level of management. 27 of the U.S. In it, the fund's actuary projected that pension costs would likely exceed $220 million annually by 2038, eating up 32% of the T's operating revenue. e. select a reasonable assumption (section 3.6). 27 Adopted September 2013. Notable changes from the existing ASOP No. The WRS' long-term return assumption for 2017 was 7.2 percent; however, the plan uses a lower discount rate of 5 percent to calculate the cost of benefits for workers once they retire. The ASB provides guidance for measuring pension and retiree group benefit obligations through the series of ASOPs listed below. ;0*TvaRUK~NU!-Jq HtkH E#|/E\D^%H+juYqB:I':IG%@&3QNZw${?Fw'm2V!fU3PBwc?52mD+h#S%|1kbb7p5~5"o-XbS GjhAN3~d&52 Other economic assumptions may include the following: Social Security benefits are based on an individuals covered earnings, the OASDI contribution and benefit base, and changes in the cost of living. Therefore, we believe employers should use the actual yields, even if negative, on high-quality corporate bonds throughout the yield curve to measure their benefit obligations. 2.4 Financial assumptions when measuring the plan obligation. The cap may be defined in the aggregate for the retiree group. A specific assumption or method that is mandated or that is selected from a specified range or set of assumptions or methods that is deemed to be acceptable by applicable law (statutes, regulations, and other legally binding authority). Actuarial Standard of Practice No. For each measurement date, the actuary should reassess the individual assumptions selected by the actuary and the relationships among them, and make appropriate adjustments. c. materiality of the assumption to the measurement (see section 3.5.2). Expected rates of return. 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. Last Revised: June 2020 assumptions, it may be an indicator that things are shifting. When issuing an actuarial report to which this standard applies, the actuary should refer to ASOP Nos. The actuarys discretion over economic assumptions has been curtailed in many situations. Section 1. The disclosure may reference any study performed, including the date of the study. 1788 0 obj <> endobj 3rd ed. bond yield rates as of the Measurement Date. Investment PolicyThe plans investment policy may include the following: (i) the current allocation of the plans assets; (ii) types of securities eligible to be held (diversification, marketability, social investing philosophy, etc. Please see appendix 2 for a detailed discussion of the comments received and the reviewers responses. Blue Chip Financial Forecasts. Are you still working? As a result of terminations and new participants, total payroll generally grows at a different rate than does a participants salary or the average of all current participants combined. 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. 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. Committee on Retirement Systems Practice Education, and the Pension and Health Sections, Society of Actuaries. The actuary should consider preparing and retaining documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. In such cases, the rounding technique should be unbiased. So it will never be reduced beyond the bottom of the range. %PDF-1.7 % Green Book: Background Material and Data on Programs within the Jurisdiction of the Committee. Judgment should be applied to determine whether a planned change is probable. ]7S[A HY7>hlS*M The average change differs statistically from zero for most . In addition, the actuary should consider whether an experience study should be performed; however, the actuary is not required to perform an experience study. Recent Data, Various Indexes, and Some Historical Data. 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 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. Funding valuations for these types of plans often use a discount rate related to the expected return on plan assets. d. supplements the guidance in ASOP No. The American Academy of Actuaries does not warrant or represent that the web version of any ASOP is accurate and disclaims any and all warranties that are or might otherwise be applicable including, without limitation, any warranties of merchantability or fitness for a particular purpose. The term reviewers in appendix 2 includes the Pension Committee and the ASB. 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. In practice, this discount rate (return on asset) assumption may be set by the legislative body, plan sponsor, a governing board of trustees, or the actuary. Mergers periodically occur between certain actuarial firms that had their own proprietary methods for developing assumed discount rates. For purposes of this appendix, the term commentator may refer to more than one person associated with a particular comment letter. The types of economic assumptions used to measure pension obligations may include inflation, investment return, discount rate, compensation increases, and other economic factors such as Social Security, cost-of-living adjustments, rate of payroll growth, growth of individual account balances, and variable conversion factors. In these situations, the actuary may select an investment return assumption that reflects a shortened measurement period that ends at the expected termination date. As a result, a range of reasonable assumptions may develop, both for an individual actuary and across actuarial practice. b. any such assumption that the actuary is unable to assess for reasonableness for the purpose of the measurement (section 3.14). Pension obligation values incorporate assumptions about pension payment commencement, duration, and amount. Effect of ReinvestmentTwo reinvestment risks are associated with traditional, fixed income securities: (i) reinvestment of interest and normal maturity values not immediately required to pay plan benefits, and (ii) reinvestment of the entire proceeds of a security that has been called by the issuer. Plan benefits or limits affecting plan benefits, including the Internal Revenue Code (IRC) section 401(a)(17) compensation limit and section 415(b) maximum annuity, may be automatically adjusted for inflation or assumed to be adjusted for inflation in some manner (for example, through regular plan amendments). xmHQEO\"CzaXYaRaTfAHD/)~`IP(I*%#"LzPB J=gf`0`00q~?_R&%%01G[32QFJXRieLpM!w: ^~ Y~=G@ BX2:R"NQY~~!noTL)A7QzEDD|!_>hhh v m'#>}uG_ 'NHnlo2A GZ#"J [l. c. Investment VolatilityPlans investing heavily in those asset classes characterized by high variability of returns may be required to liquidate those assets at depressed values to meet benefit obligations. The investment return assumption used for Tier 3 is 7.0%.. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. Having access to a new methodology would not, by itself, be considered a change in facts or circumstances that supports switching to the use of that methodology. The actuary should take into account the purpose of the measurement as a primary factor in selecting a discount rate. resulting real rate of return assumption. 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. 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 objective of selecting assumed discount rates using that method is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the pension benefits when due. Therefore, a weighted-average or "blended" discount rate, based on individual discount rates applicable to the varying periods until the benefits are due, should be used for discounting the pension benefit obligation and related pension cost components (i.e., service cost and interest cost). 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. Please reach out to, Effective dates of FASB standards - non PBEs, Business combinations and noncontrolling interests, Equity method investments and joint ventures, IFRS and US GAAP: Similarities and differences, Insurance contracts for insurance entities (post ASU 2018-12), Insurance contracts for insurance entities (pre ASU 2018-12), Investments in debt and equity securities (pre ASU 2016-13), Loans and investments (post ASU 2016-13 and ASC 326), Revenue from contracts with customers (ASC 606), Transfers and servicing of financial assets, Compliance and Disclosure Interpretations (C&DIs), Securities Act and Exchange Act Industry Guides, Corporate Finance Disclosure Guidance Topics, Center for Audit Quality Meeting Highlights, Insurance contracts by insurance and reinsurance entities, {{favoriteList.country}} {{favoriteList.content}}, An upward adjustment to certain published bond indices to restate them from a semi-annual coupon basis to an annual discount rate basis (some indices are already annualized). In some circumstances, consistency may be achieved by using the same inflation, economic growth, and other relevant components in each of the economic assumptions selected by the actuary. Assumptions such as compensation increases or cash balance crediting rates are often used to determine projected benefit streams for valuation purposes. 32, Social Insurance (unless ASOPs on social insurance explicitly call for application of this standard). Ifthecurrent assumed rate of return is below the mid-pointin the range, half of the excess gains will be used to lower the assumption. !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 actuary should select reasonable economic assumptions. Labour leader Sir Keir Starmer this morning described Sue Gray as a woman with a "formidable reputation" as he faces pressure to explain the circumstances of her job offer. If the general level of interest rates rises or declines, the assumed discount rates shall change in a similar manner. Those rates shall be extrapolated from the existing yield curve at the measurement date. 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. The actuary may assume select and ultimate inflation rates in lieu of a single inflation rate. Although less common, an OPEB health care plan may define the retiree's deductible or contribution based on similar criteria. Contributions expected to be made in future years should not be considered in determining the expected long-term rate of return on plan assets. The period subsequent to the measurement date during which a particular economic assumption will apply in a given measurement. 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. Note: This appendix is provided for informational purposes but is not part of the standard of practice. Calculate. The actuary should refer to ASOP No. Expected rates of return reflect the plan sponsor's outlook based on the plan's asset allocation. c. Market-Consistent MeasurementsAn actuary making a market-consistent measurement may use a discount rate implicit in the price at which benefits that are expected to be paid in the future would trade in an open market between a knowledgeable seller and a knowledgeable buyer. 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. 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 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. 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 multiple compensation increase assumptions in lieu of a single compensation increase assumption. Annual Yearbook, market results 1926 through previous year. endstream endobj 1792 0 obj <>stream Different plans . Although there is some latitude regarding the methodology that may be selected to determine the discount rate, the approach selected should be followed consistently. New Nyc State Comptroller Thomas P. DiNapoli today announced this the New Nyk State Common Retirement Fund's (Fund) your return what 9.51% for the declare fiscal year that ended March 31, 2022. %PDF-1.5 This content is copyright protected. Similarly, if the assumed rate of return exceeds the top of the range, MERS will reduce the assumption so that it falls within the high end of the range. Notionally, that single amount, the projected benefit obligation, would equal the fair value of a portfolio of high-quality zero coupon bonds whose maturity dates and amounts would be the same as the timing and amount of the expected future benefit payments. 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. Interest rate assumption--Suspension of new supplemental pension contracts--No right to particular price. 1 Assumption changesprimarily states lowering the assumed rate of return used to calculate pension costsaccounted for another $138 billion in increased . 3-12C-1502. Analysis of Issues and Recommended Practices, 3.2 Identification of Types of Economic Assumptions Used in the Measurement, 3.5.1 Adverse Deviation or Plan Provisions That Are Difficult to Measure, 3.5.6 Other Sources of Economic Data and Analyses, 3.6.1 Reasonable Assumption Based on Future Experience or Market Data, 3.7.2 Select and Ultimate Inflation Rates, 3.8 Selecting an Investment Return Assumption, 3.8.2 Components of the Investment Return Assumption, 3.8.3 Measurement-Specific Considerations, 3.10 Selecting a Compensation Increase Assumption, 3.10.2 Measurement-Specific Considerations, 3.10.3 Multiple Compensation Increase Assumptions, 3.11 Selecting Other Economic Assumptions, 3.11.4 Growth of Individual Account Balances, 3.12 Consistency among Assumptions Selected by the Actuary for a Particular Measurement, 3.13 Reviewing Assumptions Previously Selected by the Actuary, 3.14 Assessing Assumptions Not Selected by the Actuary, Section 4. 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. the SEC staff expects registrants to use discount rates to measure obligations for pension benefits and postretirement benefits other than pensions that reflect the current level of interest rates. e. Expected Plan Freeze or TerminationIn some situations, as stated in section 3.8.3(h), the actuary may expect the plan to be frozen or terminated at a determinable date. The following list of references is a representative sample of available sources of economic data and analyses that may be useful when selecting economic assumptions. 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 not a prescribed assumption or method set by law. 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. The discount rate is currently equal to the expected rate of return on investment based on historic al rates. The Arizona Public Safety Personnel Retirement System administers a plan for public safety personnel comprised of three tiers depending on participants' date of hire. endobj Key Characteristics Valuations measure the long term and do not directly reflect risk- Rate of increase in pensions, both in deferment and in payment; . e. U.S. Social Security Administration. d. U.S. House of Representatives, Committee on Ways and Means. In some cases, particularly in certain non-US territories, observed yields on certain high-quality corporate bonds can be negative for certain bond durations. 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 Chair also reminded the Board that the actuary performs an experience study every five years, so this issue will be revisited. Throughout this standard, any reference to selecting economic assumptions also includes giving advice on selecting economic assumptions. The actuary is not required to select assumptions that are consistent with assumptions not selected by the actuary. The investment return assumption, which includes gain-sharing, is currently 7.60%. An employer is required to measure its share of costs for health care services by projecting future costs. The type and quality of bonds in the hypothetical portfolio may depend on the particular type of market-consistent measurement. 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. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity.
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