Or, because tax rates may rise at the end of 2025, you can switch to project your federal taxes using higher rates in the Assumptions section of My Plan. 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 . <> As expected, there is a positive correlation between expected rate of return and the amount of plan assets Purpose, Scope, Cross References, and Effective Date, 2.5 Prescribed Assumption or Method Set by Another Party, 2.6 Prescribed Assumption or Method Set by Law, Section 3. Ifthecurrent assumed rate of return is below the mid-pointin the range, half of the excess gains will be used to lower the assumption. 4, 27, and 35 were exposed for comment in March 2018 with a comment deadline of July 31, 2018. resulting real rate of return assumption. All rights reserved. endobj Nonetheless, such a change should be accompanied by a sound rationale in support of the change. http://www.bls.gov/cpi/ 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 ASB also thanks its former Pension Committee members and, in particular, former Pension Committee chairperson Christopher F. Noble for their contribution in the drafting of this standard. Nothing in this standard is intended to require the actuary to select an economic assumption that has otherwise been selected by another party. 27 of the U.S. Certain plan benefits have components directly related to the accumulation of real or hypothetical individual account balances (for example, floor-offset arrangements and cash balance plans). 27. 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. Key Characteristics Valuations measure the long term and do not directly reflect risk- %%EOF It is not intended to be an exhaustive list. f. Cash Flow TimingThe timing of expected contributions and benefit payments may affect the plans liquidity needs and investment opportunities. h. Expected Plan TerminationIn some situations, the actuary may expect the plan to be terminated at a determinable date. If the actuary determines that the guidance in this standard conflicts with ASOP Nos. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. If applicable, the actuary should disclose the time period of relevant plan or plan sponsor experience that was last analyzed, including the date of any study used in the selection process. 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 median public pension plan's investments returned about 1 percent in 2016, well below the median assumption of 7.5 percenta disparity that added about $146 billion to the debt. The actuary is not required to select assumptions that are consistent with assumptions not selected by the actuary. assumptions, it may be an indicator that things are shifting. The forecast projects three-month Treasury Bill rates, 10-year Treasury Note rates, CPI-U, gross domestic product, and unemployment rates. For example, if the benefit fund must pay taxes on its investment earnings, such taxes should be included in the projection of expected returns. Calculate. 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. xT]k@|?R >vC 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. Publication date: 31 Oct 2021. us Pensions guide 2.4. The Arizona Public Safety Personnel Retirement System administers a plan for public safety personnel comprised of three tiers depending on participants' date of hire. The lower expected rates of return assumptions in almost all the developed countries for 2021 could possibly be attributed to a more conservative stand by pension sponsors regarding the fixed-income and equity markets returns in the future. For each economic assumption that has a significant effect on the measurement and that the actuary has not selected (other than prescribed assumptions or methods set by law or assumptions disclosed in accordance with section 4.2[a] or [b]), the actuary should disclose the information and analysis used to support the actuarys determination that the assumption does not significantly conflict with what, in the actuarys professional judgment, is reasonable for the purpose of the measurement. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. ]7S[A HY7>hlS*M 2019 - 2023 PwC. Actuarial Standards Board (1996) states that "generally, the appropriate discount rate is the same as . d. Investment Manager PerformanceAnticipating superior (or inferior) investment manager performance may be unduly optimistic (or pessimistic). 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. 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). 27, Selection of Economic Assumptions for Measuring Pension Obligations. As in the single-employer situation, the actuary may have discretion over other economic assumptions used to measure obligations for plans other than private single-employer plans. In these situations, the actuary may select an investment return assumption that reflects a shortened measurement period that ends at the expected termination date. https://www.census.gov/library/publications/time-series/statistical_abstracts.html The 3, 5, 10, and 20-year returns are 11.00%, 11.17%, 9.19%, and 7.65% respectively. This standard applies to actuaries when performing actuarial services that include selecting economic assumptions to measure obligations under any defined benefit pension plan that is not a social insurance program, as described in section 1.2, Scope, of ASOP No. 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. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. The actuary should also review recent gain and loss analyses, if any. 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. Select a section below and enter your search term, or to search all click The rates of change in an individuals compensation attributable to personal performance, promotion, seniority, or other individual factors. Eight comment letters were received and considered in making changes that are reflected in this revised ASOP. Section 3.16, Documentation, was revised to remove the requirement that when preparing documentation the actuary should prepare documentation in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuarys work or could assume the assignment if necessary. When the actuary is responsible for selecting or giving advice on selecting economic assumptions, the actuary may incorporate economic data and analyses from a variety of other sources, including representatives of the plan sponsor and administrator, investment advisors, economists, and other professionals. JULY 15, 2020. Among the 131 plans that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020. Companies must also disclose other economic assumptions: the expected rate of return on plan assets, the expected rate of salary increases, t*t3;]4N The investment return assumption reflects the anticipated returns on the plans current and, if appropriate for the measurement, future assets. As with other actuarial assumptions, projecting public pension fund investment returns requires a focus on the long-term. 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. Considering, quantifying, and documenting any negative adjustments to the bond index yield for callable bonds included in the index. c. U.S. Federal Reserve Weekly Statistical Release H.15. This actuarial standard of practice (ASOP or standard) does the following: a. provides guidance to actuaries when performing actuarial services that include selecting (including giving advice on selecting) economic assumptionsprimarily investment return, discount rate, post-retirement benefit increases, inflation, and compensation increasesfor measuring obligations under defined benefit pension plans; b. supplements the guidance in ASOP No. 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. Assumptions such as compensation increases or cash balance crediting rates are often used to determine projected benefit streams for valuation purposes. L7/G -e"s =~Nbd+1Tc(c4>}8S*MIroaBR8-*IaSMzWW] HSgY{s$!:}v{$OQ!9A)+C [xK;R%g]c{LI;2'Nj'u=uc&((#K@6F[eT)@kYyaP'$HH1ya^e~NdrebLr|u?91'XgiruYop g,Z j. Therefore, the substantive plan approach (see. paragraph 28). In addition, the actuary should disclose the following in such actuarial reports: The actuary should describe each significant economic assumption used in the measurement and, to the extent known, whether the assumption represents an estimate of future experience, an observation of the estimates inherent in market data, or a combination thereof. The average investment return rate assumption for U.S. public pensions has fallen below 7.0% to its lowest level in more than 40 years, according to the National Association of State Retirement Administrators. The actuary should evaluate appropriate investment data. The assumed rate of return will not be reduced below the bottom of the range. Draft revisions of ASOP Nos. Statistics for Employee Benefits Actuaries. In making this determination, the actuary should take into account changes in relevant factors known to the actuary that may affect future experience. The Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. b. 1821 0 obj <>stream Forward-Looking Expected Investment ReturnsIn some instances, the actuary will collect or develop forward-looking expected investment returns by asset class or for the entire portfolio. A downward adjustment to the yield of the index to reflect the removal of the effect of call features of callable bonds in the index, if necessary. C`dEV-SC"8iAvWWtt7y} 7dgR VZm8U-6'`w3LG =! In it, the fund's actuary projected that pension costs would likely exceed $220 million annually by 2038, eating up 32% of the T's operating revenue. ) &L%3 %FRY=s6XhrLj-IL+(\Y`?YV}_rFhq|~H,Cu`13sb%K_|4dy>K++_l`}^N&+ D#Sz Some large actuarial firms have developed specific bond matching models and nearly all of the largest actuarial firms and other organizations have developed spot-rate yield curves to assist employers in developing their discount rate assumptions. Annual Yearbook, market results 1926 through previous year. The actuary should take into account the balance between refined economic assumptions and the cost of using refined assumptions. Estimated rate of return. For example, the actuary may disclose any specific approaches used, sources of external advice, and how past experience and future expectations were considered in determining the assumption to be reasonable. Throughout this standard, any reference to selecting economic assumptions also includes giving advice on selecting economic assumptions. In these situations, if per capita claims cost estimates indicate that the cap will not be reached in certain years for at least some participants, projections of future health care coverage (rather than only the dollar-defined cap) would be required for those years. 41, Actuarial Communications, an assumption may be selected by the actuary or selected by another party. http://www.ssa.gov/policy/docs/ssb/, a. If an entity sponsors more than one pension or postretirement benefit plan, it may be appropriate to choose different discount rates for different plans on the same measurement date because of differing average durations until benefit payments are made and differing patterns of cash flow requirements. Sufficient detail should be shown to permit another qualified actuary to assess the level and pattern of each assumption. yEM$] O|ivO,j7+6[ VV_fX)cv(GNY1=(O{t.ZQJc:U`%vqwT7`=I"7aa1 Hw3Up$x"c0FbB1QcPT~sz~Ev,K86,:Q]ju}${|TRVHrcL[]TWD! The investment return assumption, which includes gain-sharing, is currently 7.60%. . The Chair also reminded the Board that the actuary performs an experience study every five years, so this issue will be revisited. Additionally, interest rates have hit all-time lows, diminishing expectations for returns on fixed-income investments, such as bonds. hb```B eahd0/- n:|x)`#pF]F y! ASC 715-60-35-79 and 35- 80 outline similar requirements for the selection of assumptions for other post-retirement employee benefit (OPEB) plans. Economic assumptions have a significant effect on any pension obligation measurement. The second exposure draft of the proposed revision of ASOP No.

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