According to a press release, the study can be used by companies in the calculation of pension expense and obligations by providing guidance for the discount rate and ROA assumptions plan sponsors will use for 2008 year-end calculations.
SEI’s research suggests short term average returns may be extremely time dependent. For example, the 20-year average ROA of a 60/40 portfolio is 7.5% as of November 30, 2008; however, it was 10.2% as of November 30, 2007, the press release said.
Though plan sponsors may receive increased pressure from auditors to review whether their ROA assumptions are reasonable, SEI’s research suggests more of a long-term view in selection of an ROA.
“Given the market performance, this will be a difficult year for determining the appropriate ROA assumption, but recent market conditions are just a consideration in the selection process,”said Jon Waite, Chief Actuary for SEI’s Institutional Group, in the press release. “Plan sponsors should still consider what they expect the portfolio to return over the long-term when selecting this assumption.”
At the end of each fiscal year, plan sponsors are required to select a discount rate based on current market conditions to be used in valuing their plan’s accounting liabilities that must be disclosed in the footnotes to their financial statements. The discount rate selected for the 2008 disclosure is the same rate that will be used in the calculation of 2009 pension expense.
A copy of SEI’s research is available by emailing firstname.lastname@example.org .