f. Cash Flow TimingThe timing of expected contributions and benefit payments may affect the plans liquidity needs and investment opportunities. 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. The actuary may want to adjust estimates based on observations to reflect the various risk premiums and other factors (such as supply and demand for tradable bond or debt securities) that might be reflected in market pricing. Actuarial Standard of Practice No. 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. Valuation Basis - uses all the assumptions in the plan's valuation as of the current actuarial valuation date. In these circumstances, the assumptions should be revised. 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. stream 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). The actuary should also include the following, as applicable, in an actuarial report: a. the disclosure in ASOP No. The rate selected from the index or indices, as well as the adjustments made to that rate, should be supported. 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. Summarized here are the significant issues and questions contained in the comment letters and the responses to each. b. endstream endobj 1792 0 obj <>stream Funding valuations for these types of plans often use a discount rate related to the expected return on plan assets. 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. Annual Yearbook, market results 1926 through previous year. The selected assumptions should also satisfy the consistency requirement of section 3.12. If the actuary determines that an economic assumption is not reasonable as of the measurement date at which it is applied, the actuary should select a reasonable new assumption. Please seewww.pwc.com/structurefor further details. endobj 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. Judgment will be necessary to determine what constitutes a consistent past practice of increases. The actuary should not assume that superior or inferior returns will be achieved, net of investment expenses, from an active investment management strategy compared to a passive investment management strategy unless the actuary believes, based on relevant supporting data, that such superior or inferior returns represent a reasonable expectation over the measurement period. 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. The actuary should follow the general process described in section 3.3 to select these assumptions. Different plans . Changes in the OASDI contribution and benefit base are determined from changes in national average wages, which reflect the change in national productivity and inflation. 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. 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. Consumer Price Index. The ASB voted in June 2020 to adopt this standard. The official version of an ASOP is as set forth in the PDF version of the ASOP, which may be downloaded from this site. 3 0 obj Eight comment letters were received and considered in making changes that are reflected in this revised ASOP. Warning: Each web version of an ASOP is provided as is for convenience of the user only and is not, and should not be considered to be, the official version of an ASOP. Each member firm is a separate legal entity. ? The actual increases in the dollar-denominated amount reflect a consistent past practice. This content is copyright protected. 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.). We use cookies to personalize content and to provide you with an improved user experience. For each assumption that is neither a prescribed assumption or method set by another party nor a prescribed assumption or method set by law, the actuary should include an explanation of the information and analysis that led to the change. The 3, 5, 10, and 20-year returns are 11.00%, 11.17%, 9.19%, and 7.65% respectively. 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). In 5 years, you'll have $11,000. stream d. Investment Manager PerformanceAnticipating superior (or inferior) investment manager performance may be unduly optimistic (or pessimistic). 27 Adopted September 2013. Notable changes from the existing ASOP No. Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. 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. Many actuaries change assumptions infrequently, while other actuaries reevaluate the assumptions as of each measurement date and change economic assumptions more frequently. d. supplements the guidance in ASOP No. The type and quality of bonds in the hypothetical portfolio may depend on the particular type of market-consistent measurement. The Pension Task Force provided its report to the ASB in February 2016. 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. [1] A discount rate is used to calculate present values of expected future payments. With respect to a particular measurement, the actuary should select economic assumptions that are consistent with the other assumptions selected by the actuary, including demographic and other noneconomic assumptions, unless an assumption considered individually is not material (see section 3.5.2). 8#i) RJM0i/-I oYqOTr;9iprU=&?~UOLXRgGG1IcvL!:s(nT.uJH5X#QG jo(DJ The last revision of ASOP No. 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.. You can set the default content filter to expand search across territories. . Among the 131 plans that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020. If a conflict exists between this standard and applicable law, the actuary should comply with applicable law. 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 Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. Those rates shall be extrapolated from the existing yield curve at the measurement date. The term reviewers in appendix 2 includes the Pension Committee and the ASB. Section 3.6.3, Combined Effect of Assumptions, was added to provide guidance regarding the combined effect of assumptions. 2019 - 2023 PwC. <> The investment return assumption can then be determined based on an asset allocation that results in an appropriate amount of risk. 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. Key Characteristics Valuations measure the long term and do not directly reflect risk- Two key takeaways from this data are that a) a lower assumed rate of inflation . The actuary should select reasonable economic assumptions. 27 of the U.S. Principal value Total interest. Compound frequency. d. U.S. House of Representatives, Committee on Ways and Means. 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). In some companies, the nonbargained employee group receives the same retiree health benefits as the collectively bargained employee group, and changes to the bargained plan have historically been made to the nonbargained plan at the same time. d. examining annuity prices to estimate the market price to settle pension obligations. Estimated rate of return. d. Compensation VolatilityIf certain elements of compensation, such as bonuses and overtime, tend to vary materially from year to year, or if aberrations exist in recent compensation amounts, then volatility should be taken into account. The top line shows the rate of return assumed on investment in equities, with growth rates ranging from around 4 to 7 per cent. It is generally inappropriate to use the yield on a single issuers bond as the discount rate even if it is of equal duration and sufficient magnitude to the benefit obligation. Yl`pn*"!SU+JEc1/Ig?fJ=K?u$fx4)$,+|M.3'@ Z{$43n/_I#%$94]soR%t9^R,jw&YRfB,c'^. 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 making this determination, the actuary should take into account changes in relevant factors known to the actuary that may affect future experience. %PDF-1.7 % Section 3.16, Documentation, was added to provide guidance regarding documentation. Contributions expected to be made in future years should not be considered in determining the expected long-term rate of return on plan assets. Please see appendix 2 for a detailed discussion of the comments received and the reviewers responses. (For this, the system will employ the 2017 rates . For example, if a pension program reduced its . In some other circumstances, an additional assumption regarding an expected increase in pay in the final year of service may be used. Different actuaries will apply different professional judgment and may choose different reasonable assumptions. In doing so, the actuary should take into account the following: b. the characteristics of the obligation to be measured (such as measurement period, pattern of plan payments over time, open or closed group, materiality, and volatility); and. The actuary is not required to use a particular type of economic assumption or to select a more refined economic assumption when in the actuarys professional judgment such use or selection is not expected to produce materially different results. 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. Notable Changes from the Second Exposure Draft. 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. Some specific points to consider include: In recent years, some actuarial firms have proposed various approaches to change the calculation of an entitys service cost and/or interest cost by using multiple (e.g., disaggregated) discount rates or spot rates reflective of varying employee demographics and timing of benefit payments. 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. It is not appropriate to make a change solely for the purpose of achieving a higher discount rate or avoiding a change in the assumed discount rate. The actuarys discretion over economic assumptions has been curtailed in many situations. Figure PEB 2-1 illustrates the calculation of the expected long-term rate of return using a weighted average approach. 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. Under this policy a portion of the excess returns will continue to be smoothed over a five year period, and some of the excess return will be immediately recognized to offset the increase in contributions. The following should be considered as appropriate adjustments to the indices: Other adjustments to the index (e.g., to replace the bonds in the index with lower quality bonds to obtain a higher yield) are not generally appropriate. At each measurement date, the actuary should determine whether the economic assumptions selected by the actuary for a previous measurement date continue to be reasonable. hb```B eahd0/- n:|x)`#pF]F y! 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. j. For each measurement date, the actuary should reassess the individual assumptions selected by the actuary and the relationships among them, and make appropriate adjustments. 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. 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. 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. 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. Such factors may include the following: a. 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. 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 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. 35. assumptions, it may be an indicator that things are shifting. 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. 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. For example, the actuary may have decided not to make any assumption with regard to four different types of future events, each of which alone is immaterial. If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority) or for any other reason the actuary deems appropriate, the actuary should refer to section 4. 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. 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. In concept, notwithstanding the long-term nature of pension and OPEB arrangements, this period-to-period volatility is an appropriate reflection of the current cost of servicesi.e., the cost of services purchased in the current period should reflect current period prices. 34, Actuarial Practice Concerning Retirement Plan Benefits in Domestic Relations Actions, that relates to the selection and use of economic assumptions. Are you still working? The actuary should also review recent gain and loss analyses, if any. The date as of which the values of the pension obligations and, if applicable, assets are determined. Estimating the projection horizons for the expected returns. For example, if an employers business is in decline and the effect of that decline is reflected in the turnover assumption, it may be appropriate to reflect a change in the retirement assumption, and it may also be appropriate to reflect a change in the compensation increase assumption. Low return (5 per cent) pension projection = a poor retirement income. Contribution BudgetingAn actuary evaluating the sufficiency of a plans contribution policy may choose among several discount rates. The actuary may assume select and ultimate inflation rates in lieu of a single inflation rate. However, it may not be appropriate to assume that future contracts will provide the same level of compensation changes as the current or recent contracts. 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. Assuming pension plans achieve a conservative 3 percent return in fiscal year 2019-2020, Reason Foundation Pension Integrity Project's calculations show that the 20-year aggregate average rate of return would be only about 5.9 percent, falling far short of the current weighted average assumed rate of return of 7.25 percent. 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. bond yield rates as of the Measurement Date. It is used in conjunction with the market-related value of plan assets (see. The expected rate of return on assets is the long-term expectation of the annual earnings rate on the assets of the pension fund. b. If the dollar-denominated caps are based on the results of collective bargaining with a labor union, there is a general presumption under. 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 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. Measurements of pension obligations do not generally include individual benefit calculations, individual benefit statement estimates, or nondiscrimination testing. If the actuary determines that the guidance in this standard conflicts with ASOP Nos. 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. hk0}E0yn&jjRC~w#gF(pNw? Assessing forward-looking capital markets returns for the individual asset classes. Chicago, IL: Ibbotson Associates. %PDF-1.5 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 first exposure draft was issued in March 2018 with a comment deadline of July 31, 2018. 7 0 obj 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. 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 discount rate used to determine the FY 2022/2023funding requirement is 7.25%, which is net of gain-sharing. 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. 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. 4 0 obj 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.
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