Selection of Economic Assumptions for Measuring …

1 actuarial Standard of Practice No. 27 Revised Edition Selection of Economic Assumptions for Measuring Pension Obligations Developed by the Pension Committee of the actuarial Standards Board Adopted by the actuarial Standards Board September 2013 Doc. No. 172 ASOP No. 27 September 2013 iiT A B L E O F C O N T E N T S Transmittal Memorandum iv STANDARD OF PRACTICE Section 1. Purpose, Scope, Cross References, and Effective Date 1 Purpose 1 Scope 1 Cross References 2 Effective Date 2 Section 2.

2 Definitions 2 Inflation 2 Measurement Date 2 Measurement Period 2 Merit Adjustments 2 Prescribed Assumption or Method Set by Another Party 2 Prescribed Assumption or Method Set by Law 3 Productivity Growth 3 Section 3. Analysis of Issues and Recommended Practices 3 Overview 3 Identification of Economic Assumptions Used in the Measurement 3 General Selection Process 3 Relevant Data 4 Other General Considerations 4 Adverse Deviation or Plan Provisions That Are Difficult to Measure 4 Materiality 4 Cost of Using Refined Assumptions 4 Rounding 4 Changes in Circumstances 5 Views of Experts 5 Selecting a Reasonable Assumption 5 Reasonable Assumption Based on Future Experience or Market Data

3 5 Range of Reasonable Assumptions 6 Selecting an Inflation Assumption 6 Data 6 Select and Ultimate Inflation Rates 6 Selecting an Investment Return Assumption 6 Data 7 Components of the Investment Return Assumption 7 Measurement-Specific Considerations 7 Multiple Investment Return Rates 9 Selecting a Discount Rate 10 Selecting a Compensation Increase Assumption 10 ASOP No. 27 September 2013 Data 11 Measurement-Specific Considerations 11 Multiple Compensation Increase Assumptions 12 Selecting Other Economic Assumptions 12 Social Security 13 Cost-of-Living Adjustments 13 Rate of Payroll Growth 13 Growth of Individual Account Balances 13 Variable Conversion Factors 13 Consistency among Economic Assumptions Selected by the Actuary for a Particular Measurement 13 Prescribed Assumption(s) 14 Section 4.

4 Communications and Disclosures 14 Communications 14 Assumptions Used 14 Rationale for Assumptions 14 Changes in Assumptions 15 Changes in Circumstances 15 Disclosure about Prescribed Assumptions or Methods 15 Additional Disclosures 15 Confidential Information 16 APPENDIXES Appendix 1 Background and Current Practices 17 Background 17 Current Practices 17 Appendix 2 Comments on the Second Exposure Draft and Responses 19 Appendix 3 Arithmetic and Geometric Returns 26 Appendix 4 Selected References for Economic Data and Analyses 30 ASOP No. 27 September 2013 ivSeptember 2013 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 FROM: actuarial Standards Board (ASB) SUBJ: actuarial Standard of Practice (ASOP) No.

5 27 This document contains the final version of a revision of ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations. Background The ASB provides coordinated guidance for Measuring pension and retiree group benefit obligations through the series of ASOPs listed below. 1. ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions; 2. ASOP No. 6, Measuring Retiree Group Benefit Obligations; 3. ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations; 4. ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations; and 5. ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension Valuations. First Exposure Draft The first exposure draft of this ASOP was issued in January 2011, with a comment deadline of April 30, 2011.

6 Twenty comment letters were received and considered in developing modifications reflected in the second exposure draft. Second Exposure Draft The second exposure draft of this ASOP was issued in January 2012 with a comment deadline of May 31, 2012. The Pension Committee carefully considered the fifteen comment letters received. Changes made to the final standard in response to these comment letters include the following: ASOP No. 27 September 2013 v1. Section , Adverse Deviation or Other Valuation Issues, was revised to note that an actuary may determine that it is appropriate to adjust the Economic Assumptions when valuing plan provisions that are difficult to measure, as discussed in ASOP No. 4. Additionally, the title of this section was revised to Adverse Deviation or Plan Provisions That Are Difficult to Measure. 2. Section , Selecting a Reasonable Assumption, was revised to describe an Economic assumption as reasonable if (among other criteria) it has no significant bias (the exposure draft used the word unbiased ).

7 3. Section , Assumptions Used, was revised to require that each significant assumption be disclosed. 4. The first clause of the fourth paragraph of section , Scope, was removed because it contained guidance that was not useful. 5. Section , Changes in Assumptions , was revised to remove the word nonprescribed from the first sentence. 6. The language in Section and Section was revised to clarify how these sections dovetail with ASOP No. 41. 7. Section was added to remove confusion regarding the interrelationship of this standard and Precept 9 of the Code of Professional Conduct. 8. Defined terms now appear in bold type. Bold type was exposed for comment with the second exposure draft of ASOP No. 4 and was well received. In addition, a number of clarifying changes were made to the text. Please see appendix 2 for a detailed discussion of the comments received and the reviewers responses.

8 Summary of Key Changes from the Previous Version of ASOP No. 27 The following are the four key changes from the previous version of ASOP No. 27 included in this version of ASOP No. 27: 1. This version clarifies that Economic Assumptions can be based either on the actuary s estimate of future experience or on the actuary s observations of the estimates inherent in market data, depending upon the purpose of the measurement. 2. The guidance regarding the reasonability of an Economic assumption has been changed from the best-estimate range standard. 3. This version requires disclosing the rationale used in selecting each nonprescribed Economic assumption or any changes made to nonprescribed Economic Assumptions . ASOP No. 27 September 2013 vi4. The guidance now distinguishes between prescribed Assumptions or methods set by law and prescribed Assumptions or methods set by another party.

9 The language in section and section was revised to incorporate this distinction and to clarify how these sections dovetail with ASOP No. 41. ASOP No. 27 is intended to accommodate the concepts of financial economics as well as traditional actuarial practice. The Pension Committee thanks everyone who took the time to contribute comments and suggestions on the exposure drafts. The Pension Committee thanks former committee members Thomas B. Lowman, Tonya B. Manning, and Frank Todisco for their assistance with drafting this ASOP. The ASB voted in September 2013 to adopt this standard. ASOP No. 27 September 2013 vii Pension Committee of the ASB Gordon C. Enderle, Chairperson Mita D. Drazilov, Vice Chairperson C. David Gustafson Alan N. Parikh Fiona E. Liston Mitchell I. Serota A. Donald Morgan IV Judy K. Stromback Christopher F.

10 Noble Virginia C. Wentz actuarial Standards Board Robert G. Meilander, Chairperson Beth E. Fitzgerald Thomas D. Levy Alan D. Ford Patricia E. Matson Patrick J. Grannan James J. Murphy Stephen G. Kellison James F. Verlautz The ASB establishes and improves standards of actuarial practice. These ASOPs identify what the actuary should consider, document, and disclose when performing an actuarial assignment. The ASB s goal is to set standards for appropriate practice for the ASOP No. 27 September 2013 1 actuarial STANDARD OF PRACTICE NO. 27 Selection OF Economic Assumptions FOR Measuring PENSION OBLIGATIONS STANDARD OF PRACTICE Section 1. Purpose, Scope, Cross References, and Effective Date Purpose This standard does the following: a. provides guidance to actuaries in selecting (including giving advice on selecting) Economic Assumptions primarily investment return, discount rate, post-retirement benefit increases, inflation, and compensation increases for Measuring obligations under defined benefit pension plans; b.