c. materiality of the assumption to the measurement (see section 3.5.2). Much of the debate centered on the economic assumptions actuaries use to measure these obligations. 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. Due to the uncertain nature of the items for which assumptions are selected, the actuary may consider several different assumptions reasonable for a given measurement. It is used in conjunction with the market-related value of plan assets (see. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. The actuary may assume multiple investment return rates in lieu of a single investment return rate. NASRA b. the disclosure in ASOP No. 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. e. it is expected to have no significant bias (i.e., it is not significantly optimistic or pessimistic), except when provisions for adverse deviation or plan provisions that are difficult to measure are included (as discussed in section 3.5.1) or when alternative assumptions are used for the assessment of risk, in accordance with ASOP No. 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 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. The actuary should take into account factors specific to each measurement in selecting an investment return assumption. 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. Information regarding the constituent bonds in the related bond index. Key Characteristics Valuations measure the long term and do not directly reflect risk- The actuarys discretion over economic assumptions has been curtailed in many situations. The cap may be defined in the aggregate for the retiree group. endobj The ASB voted in June 2020 to adopt this standard. The actuary should also include the following, as applicable, in an actuarial report: a. the disclosure in ASOP No. Politics latest updates: NHS 'on the brink' says nursing union; 10% Under ASC 715, the expected return on assets is a component of the employee benefit cost. 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.. Thus, subsequent to the mergers, companies served by those actuarial firms have access to new discount rate methodologies. The general effects of the changes should be disclosed in words or by numerical data, as appropriate. 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. As a result, a range of reasonable assumptions may develop, both for an individual actuary and across actuarial practice. In addition, the actuary should consider whether an experience study should be performed; however, the actuary is not required to perform an experience study. 4 or 6 will govern. 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. A discount rate is used to calculate the present value of expected future plan payments. Callable bonds should not be included in any bond matching (or included using the yield to the call date). The expected long-term rate of return on plan assets should also reflect the long-term earnings expectations on contributions to the plan expected to be received during the current year. 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. d. historical national wage increases and productivity growth. The employer communicates its intent to raise the dollar-denominated amount (i.e., the cap) in the future (e.g., to keep pace with inflation), or. Discount Rate Assumption 6.00% 6.50% 7.00% 7.50% 8.00% 8.50% 9.00% 9.50% . JULY 15, 2020. The actuary should disclose any explicit adjustment made in accordance with section 4.1.1. The actuary may use a discount rate that reflects the anticipated investment return from the pension fund. Because cash inflows would equal cash outflows in timing and amount, there would be no reinvestment risk in the yields to maturity of the portfolio. 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. PDF Pension Funding and The Actuarial Assumption Concerning Investment Returns For example, actuaries working with small plans may prefer to emphasize the results of general research to comply with this standard. 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. Contributions expected to be made in future years should not be considered in determining the expected long-term rate of return on plan assets. 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. Asset Allocation and the Investment Return Assumption Statistical Abstract of the United States. The Arizona Public Safety Personnel Retirement System administers a plan for public safety personnel comprised of three tiers depending on participants' date of hire. Interest rates (sometimes referred to as yields or yields to maturity) generally vary depending on the remaining maturity or duration of the obligation. Taxes may be reflected by an explicit reduction in the total investment return assumption or by a separately identified assumption. The ASB provides guidance for measuring pension and retiree group benefit obligations through the series of ASOPs listed below. Considering the inflation component. e. select a reasonable assumption (section 3.6). So it will never be reduced beyond the bottom of the range.
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