Is It Time to Bump Up DB Rate Assumptions?

Nearly all plan sponsors—99%—decreased their discount rates last year, to a level that is unlikely to be reversed in 2015, because of the small change in yield curves through November 30.

The annual pension accounting research study by SEI Institutional, in its 14th year, outlines how some plan sponsors and auditors are interpreting the events in recent years and the impact of the current economic environment. Based on this analysis, and assuming no change during December 2015, plan sponsors with a December 31 measurement date should consider increasing the discount rate they are using—but not by much, if at all.

“The yield curve increased slightly in 2015, with corporate bond indices rising 35 to 40 basis points,” says Jonathan Waite, director of the advisory team and chief actuary for SEI’s Institutional Group. “Rising discount rates will result in slightly lower plan liabilities and lower pension expense for the upcoming year. Additionally, new mortality tables might further decrease liabilities by 1% to 2% at year-end.”

The study analyzed a database of 625 corporate defined benefit plan sponsors, revealing a 75-basis point range of discount rates used for 2014 pension expense, a tighter range than last year’s analysis. The results of the study provide companies with guidance for setting the discount rate and return on asset (ROA) assumptions that pension plan sponsors will use for 2015 year-end disclosures.

In looking at year-end 2014 ROA assumptions, most plan sponsors (62%) had ROAs between 7% and 8.25%, as with year-end 2013. More than 90% had ROAs between 5.52% and 8.25%, the same range as last year. According to the paper, plan sponsors should be wary in using other plans’ asset return assumptions as a guide in setting their own. Rather, they should continue to look at long-term capital market assumptions as a guide, but customize the results for their asset allocations.

Data is derived from the 2014 SEI Plan Sponsor Accounting Database, which consists of data from Standard & Poor’s Institutional Market Services database, as well as proprietary analysis created by SEI’s Institutional Group. The report can be accessed from the SEI website