Yl`pn*"!SU+JEc1/Ig?fJ=K?u$fx4)$,+|M.3'@ Z{$43n/_I#%$94]soR%t9^R,jw&YRfB,c'^. Alternatively, the cap may be defined on an individual participant basis. endobj 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. Capital Publications, Inc., P.O. Projected value. Key Characteristics Valuations measure the long term and do not directly reflect risk- e. Expenses Paid from Plan AssetsInvestment and other administrative expenses may be paid from plan assets. b. 4, 23, Data Quality, 25, 35, 41, and 51. 27 Adopted September 2013. Notable changes from the existing ASOP No. 27. 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. 51. Green Book: Background Material and Data on Programs within the Jurisdiction of the Committee. 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. 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. These data may include consumer price indices, the implicit price deflator, forecasts of inflation, yields on government securities of various maturities, and yields on nominal and inflation-indexed debt. http://www.federalreserve.gov/releases/h15/ 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. Pension Debt Grows as Public Pension Systems Post Low Investment In the public plan arena, many entities perform assumption reviews every few years, and these reviews may or may not lead to assumption adjustments. Separate Assumptions for Different Employee GroupsDifferent compensation increases are assumed for two or more employee groups that are expected to receive different levels or patterns of compensation increases. ]7S[A HY7>hlS*M 7 0 obj 3rd ed. Companies must also disclose other economic assumptions: the expected rate of return on plan assets, the expected rate of salary increases, These assumptions include the discount rate and estimate of future salary and benefits levels. Two key takeaways from this data are that a) a lower assumed rate of inflation . The investment return assumption reflects the anticipated returns on the plans current and, if appropriate for the measurement, future assets. Assumptions such as compensation increases or cash balance crediting rates are often used to determine projected benefit streams for valuation purposes. g. Benefit VolatilityBenefit volatility may be a primary factor for small plans with unpredictable benefit payment patterns. The term reviewers in appendix 2 includes the Pension Committee and the ASB. ASC 715-60-35-79 and 35- 80 outline similar requirements for the selection of assumptions for other post-retirement employee benefit (OPEB) plans. Judgment will be necessary to determine what constitutes a consistent past practice of increases. Welcome to Viewpoint, the new platform that replaces Inform. Committee on Retirement Systems Practice Education, and the Pension and Health Sections, Society of Actuaries. The trouble with pension projections | Financial Times Over 50 comment letters were received covering a wide variety of potential ASB actions. 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). We use cookies to personalize content and to provide you with an improved user experience. Interest Rate - For pension funding, this assumption is used to discount future benefits to determine plan liabilities and it should be a reasonable expectation of the future rate of return on the pension plan's assets. Supporting Information Actuarial Assumptions - Washington Different actuaries will apply different professional judgment and may choose different reasonable assumptions. 32, Social Insurance (unless ASOPs on social insurance explicitly call for application of this standard). 27, Selection of Economic Assumptions for Measuring Pension Obligations. For example, some actuaries have looked to surveys of economic assumptions used by other actuaries, some have relied on detailed research by experts, some have used highly sophisticated projection techniques, and many actuaries have used a combination of these. http://www.cbo.gov/publication/43907. Please seewww.pwc.com/structurefor further details. Summary of Notable Changes from the Existing ASOP No. When an economic assumption is not selected by the actuary, the guidance in section 3.14 and section 4 concerning assessment and disclosure applies. <> If the general level of interest rates rises or declines, the assumed discount rates shall change in a similar manner. 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. To the extent such expenses are not otherwise recognized, the actuary should reduce the investment return assumption to reflect these expenses. ); (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. 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). The actuary should take into account the possibility that some historical economic data may not be appropriate for use in developing assumptions for future periods due to changes in the underlying environment. . PDF Testimony of State Treasurer Denise L. Nappier b. Company name must be at least two characters long. The conversion factors may be variable (for example, recalculated each year based on a stated mortality table and interest rate equal to the yield on 30-year Treasury bonds). 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. In that case, the facts and circumstances of each plan will need to be assessed, including past practices and cost sharing arrangements, in order to determine the substantive plan of each employee group. 27 was issued in September 2013. The preceding paragraph permits an employer to look to rates of return on high-quality fixed-income investments in determining assumed discount rates. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. Section 3.15, Phase-In of Changes in Assumptions, was added to provide guidance regarding the phase-in of changes in assumptions. In June 2016, the ASB directed its Pension Committee to draft appropriate modifications to the actuarial standards of practice, in accordance with ASB procedures, to implement the suggestions of the Pension Task Force. NY *e 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 Estimated rate of return. However, the selection or advice should reflect the actuarys professional judgment. The actuary is not required to select assumptions that are consistent with assumptions not selected by the actuary. Section 4.1.2, Rationale for Assumptions, was modified concerning the disclosure of the rationale for assumptions and was clarified concerning the application to planned assumption changes after the measurement date. a. U.S. Bureau of the Census. The investment return assumption, which includes gain-sharing, is currently 7.60%. Accordingly, it may be more appropriate to consider forward-looking capital markets returns for the plans investments. The disclosure may reference any study performed, including the date of the study. The disclosures should be based on the economic assumptions as of the measurement date at which they are applied without regard to changes to the assumptions planned for future measurement dates. Eight comment letters were received and considered in making changes that are reflected in this revised ASOP. A change in facts and circumstances may, however, warrant a change in the approach for determining the discount rate. f. Cash Flow TimingThe timing of expected contributions and benefit payments may affect the plans liquidity needs and investment opportunities. 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 . 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. Multiple investment return rates may include the following: a. All ASOPs Home Selection of Economic Assumptions for Measuring Pension Obligations, PDF Version: Download Here 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. Obtaining this information may require the employer to acquire a subscription from the organization that produced the bond index or from a financial information service. When selecting a compensation increase assumption, the actuary should take into account the following: The actuary should evaluate available compensation data. 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. If the ratio of Actuarial Value of Assets to Market Value of Assets is below 80% or above 120%, excess market gains will not be used to lower or buy down the rate of return, and the normal smoothing method will be applied. 41, Actuarial Communications, an assumption may be selected by the actuary or selected by another party. 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. The actuary should disclose any explicit adjustment made in accordance with section 4.1.1. The actuary should also review recent gain and loss analyses, if any. Actuarial Standards Board (1996) states that "generally, the appropriate discount rate is the same as . Eighteen comment letters were received and considered in making changes that were reflected in the second exposure draft. hbbd```b``A$YH#"o@Q9.b? Valuation Basis - uses all the assumptions in the plan's valuation as of the current actuarial valuation date. Actuaries can still set other economic assumptions, such as compensation increases, inflation, or fixed income yields. March 21, 2023 29 CA Comparison - Funded Ratio 0% 25% 50% 75% 100% Sharing your preferences is optional, but it will help us personalize your site experience. This standard is effective for any actuarial report that meets the following criteria: (a) the actuarial report is issued on or after August 1, 2021; and (b) the measurement date in the actuarial report is on or after August 1, 2021. 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. The actuary may use a discount rate that reflects the anticipated investment return from the pension fund. When the actuary is developing an investment return assumption by combining two or more components or factors, the actuary should ensure that the combination of these components or factors is logically consistent. 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. 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). Box 1453, Alexandria, VA 22313-2053. 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. b. the disclosure in ASOP No. In a recently released Issue Brief, the Academy of Actuaries discusses the interplay of the rate of return assumption and the investment mix.Focusing on the long-term return rate assumption for defined benefit pension plans, a familiar idiom comes to mind: "Don't let the tail wag the dog." If the current assumed rate of return is at or above the mid-point in the range, the full amount of excess gains will be used to lowerthe assumption. 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. Specific expertise may be needed to compute and support an appropriate adjustment. 25, Credibility Procedures, for additional guidance. 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. xWMo8\ f%E|.wc7URu,wHIIi73\^/JxvzZ:Mlq\-e^>|/G~.(9$H:u>}yl>M? 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. resulting real rate of return assumption. Follow along as we demonstrate how to use the site, 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. If these rates were lowered by 1-2 percentage points, the required pension contributions taken from salaries or via taxation would increase dramatically. 4, 27, and 35 were exposed for comment in March 2018 with a comment deadline of July 31, 2018. In July 2015, the ASB held a public hearing on actuarial standards of practice applicable to actuarial work regarding public plans. In response to specific requests for changes in the ASOPs and other activity related to public pension plans, in July 2014 the ASB issued a Request for Comments on the topic of ASOPs and Public Pension Plan Funding and Accounting. endobj For example, if $100 is owed in one year and the discount rate is 5%, then the present value of the $100 promise is $100 / (1 + 5 . In addition, the actuary should refer to ASOP No. Actuarial Standard of Practice No. Projected returns should be reduced by any outflows associated with generating those returns. 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. Compensation PracticeThe plan sponsors current compensation practice and any contemplated changes may affect the compensation increase assumption, at least in the short term. In some cases, particularly in certain non-US territories, observed yields on certain high-quality corporate bonds can be negative for certain bond durations. 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 assumptions used to measure the pension obligation are the responsibility of management. 8 0 obj xT]k@|?R >vC . In order to measure a pension obligation, the actuary will typically need to select or assess assumptions underlying the obligation. The actuary should follow the general process described in section 3.3 to select these assumptions. 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. If the actuary is using an approach that treats inflation as an explicit component of other economic assumptions or as an independent assumption, the actuary should follow the general process set forth in section 3.3 to select an inflation assumption. The State Pension Funding Gap: 2016 | The Pew Charitable Trusts The investment return assumption, which includes gain-sharing, is currently 7.60%. 3-12C-1502. B. Figure PEB 2-1 illustrates the calculation of the expected long-term rate of return using a weighted average approach. 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. A number of factors may interact with one another and may be components of other economic assumptions, such as inflation, economic growth, and risk premiums. The actuary should evaluate appropriate investment data. . 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. It is also the assumption that varies most among the different liability measurements, ranging from current yields on high-quality corporate bonds to long-term expected rates of return on assets. All rights reserved. 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. 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. For example, the actuary may expect a plan to terminate when the owner retires, or a frozen plan to terminate when assets are sufficient to provide all accumulated plan benefits. %%EOF Actuaries practicing in this area are becoming accustomed to changing assumptions frequently. assumptions, it may be an indicator that things are shifting. 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. 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. The actuary should consider preparing and retaining documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. Tax Status of the Funding VehicleIf the plans assets are not kept in a tax-exempt fund, income taxes may reduce the plans investment return. Rate of increase in pensions, both in deferment and in payment; . However, an employer's plan may have a limit or "cap" on the dollar amount of health care coverage it promises to pay. In addition to inflation, investment return, discount rate, and compensation increase assumptions, other economic assumptions may be required for measuring certain pension obligations. t*t3;]4N 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. Interest rate information for selected Treasury securities. . 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. The present value of expected future pension payments may be calculated from the perspective of different parties, recognizing that different parties may have different measurement purposes.