The EFPR Group of Companies

For over 60 years, our knowledgeable and experienced team of CPAs and business consultants have been serving individuals and businesses in Western New York and around the nation.

Evaluating Pension Plan Assumptions

Elizabeth Saylor, CPA, MSA | Senior Accountant

Evaluating the actuarial assumptions used in your pension plan is critical to understanding and properly valuing your company’s plan. There are three types of actuarial assumptions that affect pension plans.

  • 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 require 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.

Establishing the appropriate discount rate and long-term rate of return on plan assets is imperative in properly accounting for your pension plan.  We will now explore discount rates in this first part of a two-part series. Discount Rates: ASC 715-30, Defined Benefit Plans – Pensions, has determined that the discount rate for measuring pension obligations should be the rate of return available on high-quality fixed-income investments as of the plan sponsor’s year end. This rate “shall reflect the rates at which the pension benefits could be effectively settled.”  Use of an inappropriately low discount rate could result in an overstatement of the projected benefit obligation and, consequently, an overstatement of the pension liability recorded on the balance sheet. Most actuarial firms utilize computer programs to compile a hypothetical portfolio of high-quality bonds with cash flows matching a plan’s expected benefit payments. This is the preferred method of obtaining a discount rate.  It is recommended that management evaluate the discount rate used by the actuary once a year. BDO USA, LLP (BDO), a US professional services firm, publishes an annual guide on appropriate assumptions used in accounting for defined benefit pension plans, which can be used for this assessment.  For the year ended December 31, 2013, the spread for evaluating an appropriate discount rate is between 4.67% – 4.95% as noted in the following table of high quality bond yields.

12/31/13 12/31/12 12/31/11 12/31/10
Merrill Lynch 10+ High Quality 4.82% 3.94% 4.51% 5.34%
Citigroup High Grade Credit 4.75 3.83 4.41 5.27
Moody’s Aa 4.67 3.75 3.91 5.15
Towers Watson Benchmark Discount Rate 4.89 3.96 4.51 5.37
Citigroup Pension Liability Index 4.95 4.05 4.40 5.54

However, this is subject to individual facts and circumstances and should only be used as a tool for evaluation of your discount rate.  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 Senior Accountant 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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