pension rate of return assumptions

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. The preceding paragraph permits an employer to look to rates of return on high-quality fixed-income investments in determining assumed discount rates. The actuary should also include the following, as applicable, in an actuarial report: a. the disclosure in ASOP No. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. However, for some purposes (such as qualified pension plan minimum required contribution calculations), the actuary may be precluded by applicable laws or regulations from anticipating future plan amendments or future cost-of-living adjustments in certain IRC limits. 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. 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. The actuary should apply professional judgment in determining whether, given the purpose of the measurement, the payroll growth assumption should be based on a closed or open group and, if the latter, whether the size of that group should be expected to increase, decrease, or remain constant. the investment return assumption that would apply to each of the State's pension plans. 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 Compensation PracticeThe plan sponsors current compensation practice and any contemplated changes may affect the compensation increase assumption, at least in the short term. d. U.S. House of Representatives, Committee on Ways and Means. These disclosures may be brief but should be pertinent to the plans circumstances. 7 0 obj The rate selected from the index or indices, as well as the adjustments made to that rate, should be supported. The actuary may use multiple compensation increase assumptions in lieu of a single compensation increase assumption. The assumed rate of return will not be reduced below the bottom of the range. Discount rates dropped to historical levels in 2019. For this purpose, an assumption is reasonable if it has the following characteristics: a. it is appropriate for the purpose of the measurement; b. it reflects the actuarys professional judgment; c. it takes into account current and historical data that is relevant to selecting the assumption for the measurement date, to the extent such relevant data is reasonably available; d. it reflects the actuarys estimate of future experience, the actuarys observation of the estimates inherent in market data (if any), or a combination thereof; and. The median return for state-managed plans was 27% in 2021. 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. 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. 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. The results also indicate that the adopted assumptions are influenced by asset allocations and the fiscal condition of pension plans. 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. Unless otherwise noted, the section numbers and titles used in appendix 2 refer to those in the second exposure draft. If the actuary takes into account the investment policy in selecting an investment return assumption, the actuary should consider reflecting whether the current investment policy is expected to change during the measurement period. 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. For each previously selected assumption that the actuary determines is no longer reasonable, the actuary should select a reasonable new assumption. NJ Division of Investment 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. The Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. g. Benefit VolatilityBenefit volatility may be a primary factor for small plans with unpredictable benefit payment patterns. 0 b. Among the 131 funds that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020 as . 2.4 Financial assumptions when measuring the plan obligation - PwC Capital Publications, Inc., P.O. Considering, quantifying, and documenting any other adjustments to the bond index yield. 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. Although less common, an OPEB health care plan may define the retiree's deductible or contribution based on similar criteria. The investment return assumption used by public pension plans typically contains two components: inflation and the incremental return above the assumed rate of inflation, or the real rate of return. Please seewww.pwc.com/structurefor further details. The ASB provides guidance for measuring pension and retiree group benefit obligations through the series of ASOPs listed below. 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. The investment return assumption, which includes gain-sharing, is currently 7.60%. b. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions. Economic assumptions pertain to such factors as the rate of wage growth and the future expected investment return on the fund's assets. To evaluate relevant data, the actuary should review appropriate recent and long-term historical economic data. 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. 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. 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. The actuary should take into account the balance between refined economic assumptions and the cost of using refined assumptions. https://www.census.gov/library/publications/time-series/statistical_abstracts.html The staff suggests that fixed-income debt securities that receive one of the two highest ratings given by a recognized ratings agency be considered high quality (for example, a fixed-income security that receives a rating of Aa or higher from Moody's Investors Service, Inc.). Effective Date: August 01, 2021 @l17=D2HN-&X$r`3 NLl`{)"3 4 or 6 will govern. 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. hb```B eahd0/- n:|x)`#pF]F y! 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 . 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 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). Impact on FY 2023 Contributions 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. Pension Assumptions and Earnings Manipulation | NBER 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.

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