%%EOF 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. Although less common, an OPEB health care plan may define the retiree's deductible or contribution based on similar criteria. The Pension Board voted 8-1, with Mr. Worzalla disapproving, to adopt an assumed rate of return of 7.4% effective January 1, 2024, 7.2% effective 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. 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. Section 3.14, Assessing Assumptions Not Selected by the Actuary, replaced previous section 3.13, Prescribed Assumption(s), and was expanded to provide additional guidance regarding assessing assumptions not selected by the actuary. As expected, there is a positive . endobj 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. The main remedy when returns are this low is to increase monthly pension contributions so you can reach the income you need. d. Investment Manager PerformanceAnticipating superior (or inferior) investment manager performance may be unduly optimistic (or pessimistic). b. 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. 3 0 obj The disclosure may reference any study performed, including the date of the study. The investment return assumption used to measure pension liabilities As you can see, changing the annual average pension growth rate . 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. Whether the assumed rate of return is lowered, and the magnitude of any reduction, depends on the excess gains available and the most recent range of reasonable economic assumptions as provided byMERS' consulting actuary. 1821 0 obj <>stream The actuary should not give undue weight to recent experience. The assumed rate of return will not be reduced below the bottom of the range. A 2019 amendment to the Mississippi PERS funding policy stipulates that the investment return assumption will be reduceduntil it reaches the rate recommended by the actuary in the most recent experience study using investment gains based on the following parameters: 2% excess return over assumed rate, lowerassumption by 5 basis points, 5% excess return over assumed rate, lowerassumption by 10basis points, 8% excess return over assumed rate, lowerassumption by 15basis points, 12% excess return over assumed rate, lowerassumption by 20basis points, The assumed rate of return for the Nebraska School Retirement System will decline by 10 basis points each year until reaching 7.0 percent effective FY 24., Chart: Latest distribution of investment return assumptions, Chart: Historical distribution of investment return assumptions, Chart: Historical change in median and average investment return assumption, Issue Brief: Investment Return Assumptions, Looking Forward: The Application of the Discount Rate in Funding US Government Pensions, September 2018, Asset Allocation and the Investment Return Assumption, American Academy of Actuaries, July 2020. In February 2017 the CalPERS Board adopted a risk mitigation policy, effective beginning FY 2021, that calls for a reduction in the systems investment return assumption commensurate with the pension fund achieving a specified level of investment return. 4 The selected assumptions should also satisfy the consistency requirement of section 3.12. bond yield rates as of the Measurement Date. Across all plans in the data, the average return assumptions of pensions has declined from 8.02 percent in 2001 to 7.60 percent in 2015. Figure 6 clearly illustrates that the returns assumptions used in the Pensions Commission modelling are no longer applicable - the real rates of return assumed by the Pensions Commission were 2.5 percentage points (ppt) higher for government bonds, 2.4 ppt higher for corporate bonds and 2.0 ppt higher for equity markets than PwC's latest . 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. 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. https://www.census.gov/library/publications/time-series/statistical_abstracts.html 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. Select and Ultimate Investment Return RatesAssumed investment return rates vary by period from the measurement date (for example, returns of x% for the first 10 years following the measurement date and y% thereafter). All rights reserved. Despite beating investment return targets by 20% in 2021, many public pension plans are now taking the opportunity to reduce their investment risks by lowering investment return rate assumptions to more realistic long-term growth rates. the Investment Return Assumption Key Points The expected investment return for a pension plan's assets is used as the discount rate for public and multiemployer pension plan valuations and is sometimes referred to as the "actuarial" rate of return. Section 3.6.3, Combined Effect of Assumptions, was added to provide guidance regarding the combined effect of assumptions. the investment return assumption that would apply to each of the State's pension plans. Accordingly, it may be more appropriate to consider forward-looking capital markets returns for the plans investments. 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. assumptions, it may be an indicator that things are shifting. 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 investment return assumption used for Tier 3 is 7.0%.. As discussed in ASOP No. Other economic assumptions may include the following: Social Security benefits are based on an individuals covered earnings, the OASDI contribution and benefit base, and changes in the cost of living. 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. The actuary should take into account factors specific to each measurement in selecting an investment return assumption. 3rd ed. To evaluate relevant data, the actuary should review appropriate recent and long-term historical economic data. 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. But many pensions have annual investment return assumptions in the 7-8% p.a. If these rates were lowered by 1-2 percentage points, the required pension contributions taken from salaries or via taxation would increase dramatically. 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. 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. 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. Box 1453, Alexandria, VA 22313-2053. Over 50 comment letters were received covering a wide variety of potential ASB actions. An employer is required to measure its share of costs for health care services by projecting future costs. The last revision of ASOP No. Low return (5 per cent) pension projection = a poor retirement income. The actuary is not required to select assumptions that are consistent with assumptions not selected by the actuary. The general effects of the changes should be disclosed in words or by numerical data, as appropriate. Alternatively, the actuary may use a discount rate appropriate for defeasance, settlement, or market-consistent measurements. If the actuary learns of an event occurring after the measurement date that would have changed the actuarys selection of an economic assumption, the actuary may reflect this change as of the measurement date. 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. Although there is some latitude regarding the methodology that may be selected to determine the discount rate, the approach selected should be followed consistently. 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. 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 Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. Ifthecurrent assumed rate of return is below the mid-pointin the range, half of the excess gains will be used to lower the assumption. Discount rates dropped to historical levels in 2019. It is appropriate in estimating those rates to look to available information about rates implicit in current prices of annuity contracts that could be used to effect settlement of the obligation (including information about available annuity rates published by the Pension Benefit Guaranty Corporation). peb_guide. Estimates suggest state-managed public pension systems likely added over $200 billion in additional pension debt in 2020. Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. Consumer Price Index. Are you still working? Other investment risks may also be present, such as default risk or the risk of bankruptcy of the issuer. Communications and Disclosures, 4.1 Required Disclosures in an Actuarial Report, 4.2 Disclosure about Assumptions Not Selected by the Actuary, Appendix 1Background and Current Practices, Appendix 2Comments on the Second Exposure Draft and Responses, Actuarial Standards-Setting Process Flowchart, https://www.census.gov/library/publications/time-series/statistical_abstracts.html, http://www.federalreserve.gov/releases/h15/. The forecast projects three-month Treasury Bill rates, 10-year Treasury Note rates, CPI-U, gross domestic product, and unemployment rates. 32, Social Insurance (unless ASOPs on social insurance explicitly call for application of this standard). After identifying the types of economic assumptions to be used for the measurement, the actuary should follow the general process set forth below for selecting each economic assumption for a specific measurement: a. identify components, if any, of the assumption; c. take into account factors specific to the measurement; d. take into account other general considerations, when applicable (section 3.5); and. b. c. historical and current investment data including, but not limited to, real and nominal returns, the inflation and inflation risk components implicit in the yield of inflation-protected securities, dividend yields, earnings yields, and real estate capitalization rates. Document Number: 197 The second exposure draft of the proposed revision of ASOP No. Over the past decade, pension funds have lowered the return assumptions that inform their investment decisions from a median of 8% in 2009 to 7.25% as of 2019. Depending on a particular measurements circumstances, the actuary may disclose information about specific interrelationships among the assumptions (for example, investment return: x% per year, net of investment expenses and including inflation at y%). (For this, the system will employ the 2017 rates . In July 2015, the ASB held a public hearing on actuarial standards of practice applicable to actuarial work regarding public plans. Such factors may include the following: a. The rate selected from the index or indices, as well as the adjustments made to that rate, should be supported. By continuing to browse this site, you consent to the use of cookies. Note: This appendix is provided for informational purposes but is not part of the standard of practice. The actual increases in the dollar-denominated amount reflect a consistent past practice. 1 0 obj Changes in the discount rate also affect the interest cost component of net periodic benefit cost, although the effect of an increase (or decrease) in the rate will be offset to some degree by the effect of the corresponding decrease (or increase) in the PBO or APBO to which the interest rate is applied. The median return for state-managed plans was 27% in 2021. Throughout this standard, any reference to selecting economic assumptions also includes giving advice on selecting economic assumptions. 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. endstream 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. 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. 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. NY *e 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. This standard applies to the actuarial advice given in such situations, within the constraints imposed by the relevant accounting standards. These disclosures may be brief but should be pertinent to the plans circumstances. The period subsequent to the measurement date during which a particular economic assumption will apply in a given measurement. This brief discusses how investment return assumptions are established and evaluated . [,V$5|Tu`%Lw}yAY#"45--"syE)v+oO5^9jR@byd\w-O^6,T|@YYfjq Y) bwb|W} `}52=^Oz4o{e]V[X_y h B *@H @lXAZf$GGg2E;h@j Cp3"gtxP+rKknBI396``P47y)#+H301= 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! 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. 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. stream The investment return assumption, which includes gain-sharing, is currently 7.60%. Discount Rate: Rate used to discount the liabilities .
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