The following discusses the consideration of certain factors related to changes in assumptions used to calculate a plan's accumulated
benefits.
Changes in actuarial assumptions made to reflect changes in the plan's expected experience shall be viewed as changes in estimates. That is, the effects of those changes shall be accounted for in the year of change (or in the year of change and future years if the change affects both) and shall not be accounted for by restating amounts reported in financial statements for prior years or by reporting pro forma amounts for prior years.
Assumed rates of return used to determine the actuarial present value of accumulated plan benefits may change periodically due to changes in expected rates of return or as changes occur in the factors affecting estimates. A change in assumed rates of return need not necessarily result when a decision is made to replace fixed-income securities currently held with lower-rated fixed-income securities because the higher yield associated with the lower-rated securities reflects increased risk. Accordingly, a higher ultimate return on the aggregate investment portfolio may not result.
The assumed rates of return required by this Subtopic relate to the periods for which payment of benefits is deferred and therefore encompass the periods on which automatic cost-of-living adjustments are based. Paragraph
960-20-35-10 discusses a relationship between assumed rates of inflation and assumed rates of return.
The determination of assumed rates of return for most plans is, to a significant degree, a matter of judgment.
Accordingly, accumulated plan benefits will generally not be discounted solely at rates of return expected on existing investments, and changes in assumed rates of return will probably not equal the change during the reporting period in either short-term or long-term interest rates. A factor to consider in assessing the extent to which short-term and long-term interest rates should impact assumed rates of return is the degree to which the timing of cash inflows from related existing or potential investments matches the timing of payments of accumulated plan benefits. However, to the extent that assumed rates of return are affected by the rates of return expected from existing investments, this Subtopic requires that those expected rates be based on the values presented for those investments in the plan's financial statements. Further, the assumed rates of return at which accumulated plan benefits are discounted shall be reconsidered in light of changes in the fair values of investments between one period and another.
This Subtopic requires that assumed rates of inflation used in measuring benefits attributable to automatic cost-of-living adjustments be consistent with those inherent in assumed rates of return. If an automatic cost-of-living adjustment is subject to a maximum annual percentage increase (sometimes referred to as a cap), the assumed rate of benefit increase may differ from the assumed rate of inflation.
Nonrecognition of future withdrawals would overstate the benefits reasonably expected to become payable. Consideration of future withdrawals is also consistent with consideration of future service in determining employees' expected eligibility for increased benefits.
Because administrative expenses are incurred when making benefit payments, those expenses shall be considered in determining the benefit information. However, in similar circumstances, their use results in the disclosure (pursuant to paragraph 960-20-50-8) of different rates of return. See paragraph
960-20-35-1(c) for alternate methods of reflecting administrative expenses in the determination of benefit information.
The literal application of certain of the requirements of the Plan Accounting—Defined Benefit Pension Plans Topic could require a degree of detail in recordkeeping and computation that might be unduly burdensome. Accordingly, the use of averages or other methods of approximation is appropriate, provided the results obtained are substantially the same as the results contemplated by this Topic.
The use of averages and other methods of approximation consistent with recommended actuarial practice may be useful in conjunction with other provisions of the Plan Accounting—Defined Benefit Pension Plans Topic, particularly if applied to plans sponsored by small employers.