FAS 87 Discount Rate Assumptions Decline

October 14, 2003 (PLANSPONSOR.com) - Assumption rates used by plan sponsors for FAS 87 and FAS 106 discount rate calculations are on the decline.

The average FAS 87 assumption rate stood at 6.54% in 2003, down from 6.96% the year before.    Likewise, the 60 United States plan sponsors who responded to the survey reported a decline in FAS 106 assumption rates, which now stand at 6.40% after coming in at 6.92% in 2002, according to the Society of Actuaries FAS Assumption Survey.  

FAS 87 assumption rates were down indiscriminate of plan size or organization type.    Not-for-profit organizations saw their assumption rate fall to 6.40% from 6.75%, while private and publicly traded companies came in with 2003 assumption rates of 6.56% and 6.58%, respectively.   By plan size the bigger they were, the harder they fell, as large plans dropped to an assumption rate of 6.49% from 7.07%, followed by medium plans’ fall to 6.63% from 7.05% and smaller plans now using an assumption rate of 6.51% after an average of 6.85% in 2002.  

FAS 106 assumptions were similarly not immune and saw decreases in rates across the spectrum.    By organization, private companies were now using a 6.41% rate, after 6.95% was the average in 2002.   Meanwhile, publicly traded companies saw their average 2003 assumption rate decrease to 6.42% from 6.88% and not-for-profit organizations were down to 6.25% from 7.00%.   Drops by plan size in FAS 106 assumptions were fairly uniform, as large plans were now using a 6.52% assumption rate after 2002’s 7.02%; medium plans reporting a 6.22% rate after 6.81% and smaller plans came in with an assumption rate of 6.40% for 2003, compared to last year’s 6.90%.  

As FAS 106 discount rate assumptions were headed south, FAS 106 health-care trends were headed up to 9.31% in 2003 from 8.83% in the previous year.    Rates were scattered across the plan breakdowns, with not-for profits now using a 7.50% rate, compared with 9.91% and 9.36%, respectively, for private and publicly traded companies.  

Other Factors

The decline was not limited to assumption rates, but also touched return on assets and salary scale measurements across all organizational types and plan sizes.    Using FAS 87 assumptions, the return on assets came in at an average of 7.94% for 2003, from 8.06% in the previous year.   While not enough to overcome declines in the other two organization types,  private plans actually noted an increase in return on assets, which now stands at 7.57%, up from 7.50% in 2002.   Otherwise not-for-profit and publicly traded companies reported return on asset levels of 8.09% and 8.42%, respectively, down from 8.23% and 8.84%, respectively, in 2002.

Projected salary increases for 2003 also came in less than 2002’s figures, at an average of 3.61% from 3.76%.   Private companies are now assuming 2003 salary increases of 3.67% from 3.87% in 2002, as publicly traded companies are using 3.30%, from 3.46% the year before.   Most of the declines were concentrated in private and public companies, as not-for profits held true to 2002’s 3.95%.   By company size, the majority of the salary scale decline was concentrated among small plans that are using 3.08% for 2003 from 3.24% in 2002.   Keeping fairly close in their projections were large plans (4.08%) and medium sized plans (4.07%).

On a much smaller scale – a sample size of seven plans – Canadian defined benefit plan sponsors reported a decrease in FAS 87 Discount Rate, to 6.52 from 6.70 in 2002.   Additionally, the return on assets and salary increase projections also were on the wane.   The average return on assets went down to 7.07 from 7.33 in 2002, while Canadian plan sponsors are forecasting salary increases of 6.14%, compared with 6.21% in the previous year.

A copy of the complete survey results can be found at   http://www.soa.org/sections/SOA_FASAssumption_Survey0903.pdf.