actuarial assumed rates or return and discount rates @12/31/01

[Guest Bill Drimel]

As a CPA and auditor, one of my tasks is to consider whether significant actuarial assumptions used to calculate employers' accounting for defined benefit plans are "reasonable." Is there any published information on actuarial assumed rates of return on plan assets and discount rates that are considered "reasonable" in light of current market and economic conditions, or ranges of rates expected to be used in 12/31/01 actuarial assumptions?

[david rigby]

If you are focusing on the discount rate under SFAS No. 87, my experience is that it works in one of two ways:

- The auditor (or some committee if a large firm) gives a range of acceptable discount rates, usually about every calendar quarter. For example, at 12/31/00, one firm told me a range of 7.0% to 7.5%. Then the plan sponsor, perhaps with consultation with the actuary, will pick a value in that range.

- Some plan sponsors and auditors look to the actuary to make a recommendation. However, the responsibility for choosing the rate belongs to the plan sponsor. When in this situation, I ask the sponsor and auditor for their own opinions (guesses). But I also contribute whatever outside information I can find, such as the rates for high-quality corporate bonds. A consensus ususally results from this discussion, but I make it clear that the sponsor is doing the choosing.

With regard to your question of published rates, there is usually only such information after the fact, in the form of surveys. Here is a recent survey of the top 50 corporations, as of December 31, 2000. http://www.arthurandersen.com/website.nsf/...S87FAS106Survey!OpenDocument

[Guest VTM]

Is there another website that contains similar information but on a more current basis? Thanks in advance for any help!

[david rigby]

Watson Wyatt has some information:

http://www.watsonwyatt.com/research/resren...id=w-363&page=1

http://www.watsonwyatt.com/research/resren...id=W-476&page=1

http://www.watsonwyatt.com/research/resren...id=w-554&page=1

http://www.watsonwyatt.com/us/research/fas/

This survey from Milliman contains some information:

http://www.milliman.com/eb/pension-fund-su...2003summary.pdf

[MGB]

Bill and VTM,

Surveys do not determine reaonability. What is reasonable for one plan may not be reasonable for another. Don't fall into the "lemming" trap of analysis like many others do.

For discount rates, the "duration" of the liabilities is the key issue. If the plan is a "legacy" plan with primarily older, retired annuitants, the duration is very short. In looking at a yield curve, the discount rate should be low. However, if it is a primarily young, active participants, then the duration is very long and the discount rate should be at the high end of the yield curve. For a published yield curve that is designed to be used for this purpose (it has under 2% at short durations, up to almost 7% at the longest duration), see:

http://www.soa.org/sections/pendis.html

For expected return on assets, the key issue is asset mix. If the plan is invested primarily in money market funds, the expected return should be extremely low. On the other hand, with a high concentration of stocks, it should be fairly high. Note that the expected return is NOT what is expected in the next year...it is the annual yield expected over the long run, given the current asset mix. Depending on who the actuary is for the plan, intricate computer models are available for this analysis. Substantiating the selection of return based on these models is a common thing in the national actuarial firms, but much less common by local or regional actuaries.