The EFPR Group of Companies

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Evaluating Pension Plan Assumptions

Part II: Long–Term Rate of Return on Plan Assets by Elizabeth Saylor, CPA, MSA

In the first installment of this two–part series, we identified the three types of actuarial assumptions necessary to understand and properly value a pension plan.

  • The first type of assumption is established exclusively by actuaries and includes rates of mortality and disability.
  • The second type takes into account the knowledge of the plan sponsor, including expected termination rates, salary increases and average retirement age.
  • The final category of assumptions affecting pension plans requires significant judgment of the plan sponsor in conjunction with the plan actuary, and includes determination of the discount rate and the long-term rate of return on plan assets.

In addition to the discount rate examined in Part I, we will now consider the long–term rate of return on plan assets.

Long–Term Rate of Return on Plan Assets

ASC 715–30 indicates that the long-term rate of return represents the average rate of earnings expected on the plan’s invested funds. Milliman, an actuarial and consulting firm, has noted that “one of the most significant trends over the past decade is that the market’s consensus views on long–term future investment returns have slid downward.” A lower assumed rate of return correlates to higher reported accrued liabilities and an increase in contributions needed to fund the plan. The long–term rate of return is not expected to change each year; however, it should be reviewed annually for reasonableness. The Milliman Public Pension Funding Study, which reviews the funded status of the 100 largest US public pension plans, provides a summary of median pension plan rates of return. The median rate of return on plan assets was 7.75% for 2013, down from 8.00% for 2012. The median asset allocation remained consistent at 49% equity, 28% fixed income and 23% other in 2013 compared to 51% equity, 30% fixed income and 19% other in 2012. Median funding levels note that pension plan assets approximated 69% of the projected benefit obligation at December 31, 2013 and 70% at December 31, 2012. It is the role of the plan sponsor’s management to make its best estimate of the discount rate and the long–term rate of return on plan assets. While an actuary may suggest assumptions for accounting for pension plans, it is ultimately management’s responsibility to ensure that they are reasonable and in accordance with GAAP. Professional services firms like BDO and Milliman provide reasonable expectations for plan sponsors to utilize in annually reviewing and documenting the assumptions used in accounting for their specific pension plan. This will help facilitate a smooth audit and ensure proper reporting of your pension plan.

At EFPR Group, we are always available to assist you as questions or concerns about this process arise. Please call us at (585) 427–8900.

Elizabeth Saylor, CPA, MSA, is a Supervisor in EFPR Group’s Attest department. Since joining EFPR Group in 2010, she has acquired experience in working with publicly traded companies, employee benefit plans and not–for–profit and for–profit health care providers through providing compliance and financial statement audits and reviews. Elizabeth graduated from SUNY Geneseo in 2009 with a Bachelor of Science degree in Accounting (magna cum laude) and from the William E. Simon Graduate School of Business at the University of Rochester in 2010 with a Masters of Science degree in Accounting (magna cum laude). She is a member of the American Institute of Certified Public Accountants (AICPA) and she currently serves as a board and finance committee member of the Court Appointed Special Advocates (CASA) of Rochester.

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