endstream endobj startxref Similar to the demographic information discussed in, The assumed discount rates should be reevaluated at each measurement date (including interim remeasurements required in connection with accounting for plan amendments, curtailments, and settlements) to determine whether they continue to reflect the best estimates of then-current rates (see, The SEC staff provided guidance on the selection of discount rates in. t*t3;]4N Social Security Bulletin. The disclosure may reference any study performed, including the date of the study. hb```B eahd0/- n:|x)`#pF]F y! The findings of the study are important in part because they draw attention to possible linkages between the quality of financial information that is reported about the financial condition of public pension funds . The actuary should refer to ASOP No. 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. All assumptions should reflect consistent expectations of future economic conditions, such as future rates of inflation. !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 investment return assumption used for Tier 3 is 7.0%.. Also, some actuarial cost methods take into account the present value of future compensation. 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). endobj Using solely historical returns as an approximation of the rate of return may not produce an appropriate rate, particularly if the market has moved significantly in one direction in recent years. 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. The rate shown applies to the plans Non-Hazardous plan, which accounts for more than 90 percent of the Kentucky ERS plan liabilities. Rates reflect all known announced rates as of November 2022. The rates of change in a groups compensation attributable to the change in the real value of goods or services per unit of work. 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. 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 a prescribed assumption or method set by another party. In these situations, the actuary may select an investment return assumption that reflects a shortened measurement period that ends at the expected termination date. The discount rate is currently equal to the expected rate of return on investment based on historic al rates. A discount rate is used to calculate the present value of expected future plan payments. 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. 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. 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. In some cases, particularly in certain non-US territories, observed yields on certain high-quality corporate bonds can be negative for certain bond durations. Consistency is not necessarily achieved by maintaining a constant difference between one economic assumption and another. 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. %PDF-1.7 % http://www.federalreserve.gov/releases/h15/ http://www.bls.gov/cpi/ The actuary should identify the types of economic assumptions to use for a specific measurement. Once the published yield is adjusted based on the considerations listed above, it is acceptable to round to the next 25 basis point interval, if the employer's policy is to do so. 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 actuary should take into account the purpose of the measurement as a primary factor in selecting a discount rate. This relationship is especially strong for firms whose reported income is the most sensitive to pension assumptions. %PDF-1.5 Document Number: 197 27 was issued in September 2013. The expected long-term rate of return on plan assets should generally be based on the investment portfolio that existed as of the measurement date without consideration of proposed changes to the portfolio subsequent to the measurement date. Low return (5 per cent) pension projection = a poor retirement income. 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. Additional changes were made to improve readability, clarity, or consistency within this ASOP and ASOP No. Economic assumptions have a significant effect on any pension obligation measurement. 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 a. U.S. Bureau of the Census. In nonprescribed situations, practice is still dependent upon the individual actuary. The service cost component of net periodic benefit cost could be volatile from year to year as a result of using current discount rates because the changes in discount rates will immediately affect the PBO and EPBO, which is the basis for determining service cost. 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. 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. Assessing forward-looking capital markets returns for the individual asset classes. Mergers periodically occur between certain actuarial firms that had their own proprietary methods for developing assumed discount rates. 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 investment return assumption, which includes gain-sharing, is currently 7.60%. 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 actuarys report should state the source of any assumption that the actuary has not selected. b. the disclosure in ASOP No. Nothing in this ASOP is intended to require the actuary to disclose confidential information. 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. 27 of the U.S. 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. Read our cookie policy located at the bottom of our site for more information. In these circumstances, the assumptions should be revised. 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. IoD This increase in debt impacting almost every pension plan in the country is primarily a result of investment return rates failing to meet overly optimistic investment return assumptions set by pension systems. UksyqOiiXdQN~[n:)Kp. 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. If the dollar-denominated caps are based on the results of collective bargaining with a labor union, there is a general presumption under. 4 or 6, ASOP Nos. Valuation Basis - uses all the assumptions in the plan's valuation as of the current actuarial valuation date. When an economic assumption is not selected by the actuary, the guidance in section 3.14 and section 4 concerning assessment and disclosure applies. 2 0 obj Contributions expected to be made in future years should not be considered in determining the expected long-term rate of return on plan assets. Welcome to the Division of Investment. If high-quality corporate bonds available in the marketplace are trading at negative yields (i.e., their present value is greater than their nominal future cash flows), an employer would need to purchase an amount of bonds that exceeds the notional undiscounted future benefit payments to generate a stream of future cash flows to pay the benefits when due.
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pension rate of return assumptions 2023