2013 Global Survey of Accounting Assumptions. for Defined Benefit Plans. Executive Summary

Transcription

1 2013 Global Survey of Accounting Assumptions for Defined Benefit Plans Executive Summary

2 Executive Summary In broad terms, accounting standards aim to enable employers to approximate the cost of an employee s pension or other postretirement benefit over that employee s service period. Any benefit accounting method that recognizes the cost of benefits before their payment becomes due must be based on estimates or assumptions about future events that will determine the amount and timing of benefit payments. Two of the key economic assumptions in the determination of benefit costs under an accounting standard are the discount rate and inflation. Under ASC 715, there is a further key economic assumption, the expected long-term rate of return on plan assets (for funded plans). The most important demographic assumption is the mortality rate/life expectancy. In many countries, additional assumptions can also play a key role, and we discuss some of these in our full report. The observations in this report are based on market developments between 2011 year-end and 2012 year-end. During 2012, returns on equity markets and long-duration bonds were substantial. Investment gains (along with large contributions from sponsors) resulted in increased plan assets. However, for the Eurozone and some other countries, market gains were mitigated by a growth in plan obligations due to declining discount rates. Key Findings Our full report, which represents 1,280 companies from 45 countries, had the following key findings: Overall, we observed a significant decrease in both government and corporate bonds from last year-end. Most long-term bond yields trended downward significantly during the year, and discount rates followed suit. Funded status remained steady for the majority of countries in this analysis. This is likely due to an increase in plan liabilities caused by the decline in discount rates, which offset any asset gains realized in these plans. The exception was the Eurozone, where the significant drop in bond yields, and hence discount rates, caused the liabilities to increase by more than the asset gains could overcome. The majority of surveyed countries have implied life expectancies between 20 and 25 years. The impact of the differences in this assumption will vary depending on whether the typical payment form is lump sum or annuity. Since December 31, 2012, many countries with funded pension plans have seen positive investment returns and slightly higher bond yields. Funded status for those locations should have improved. However, the outcome at the end of the year is currently unpredictable Global Survey of Accounting Assumptions Executive Summary I 1

3 Discount Rates Discount rates are used to calculate the present value of benefit obligations, and the service and interest cost portion of benefit expense. While ASC 715 does not explicitly define the quality of the bond yields, most plan sponsors base their discount rate on AA-rated bonds. IAS 19 refers to high-quality corporate bond yields, which is generally interpreted to mean AA rated or better. The primary focus for corporations has been placed on long-term, high-quality corporate bonds of appropriate duration. Where there is no deep market in corporate bonds, it is customary for ASC 715 discount rates to be based on government bonds but adjusted by some level of risk premium to approximate corporate bond yields. By contrast, under IAS 19, for countries where there is no corporate bond market, the standard requires the use of government bonds with no additional risk premium when determining discount rates. Therefore, we present results for discount rates separately. Figure 1 shows the average discount rates for the 2013 expense and 2012 expense, using ASC 715 and IAS 19. These tables include values for companies with December 31 measurement dates only. The similarity of ASC 715 and IAS 19 discount rates in most of the countries shown in Figure 1 suggests that these countries are regarded as having a sufficiently deep corporate bond market. In our complete findings, we see that in some countries where the corporate bond market is not seen as deep enough Australia, India and Turkey, for instance the average discount rate is noticeably lower under IAS 19 than under ASC 715. Over the year, for countries that set discount rates using corporate bond yields, most long-term bond yields trended downward significantly, and discount rates followed suit. Figure 1. Discount rates for plans Averages Averages ASC 715 Averages IAS Canada 3.92% 4.33% 3.96% 4.56% Germany 3.30% 5.40% 3.23% 4.96% Japan 1.48% 1.65% 1.37% 1.48% Netherlands 3.49% 5.57% 3.36% 5.02% Switzerland 1.76% 2.53% 1.80% 2.37% United Kingdom 4.48% 5.04% 4.44% 4.92% United States 3.97% 4.68% 3.79% 4.60% Inflation The assumption for long-term price inflation influences other economic assumptions such as: Rate of salary increases Rate of increase in pensions, both in deferment and in payment Rate of increase in the social security parameters reflected in the pension benefit formula Figure 2 shows the average inflation assumption for the 2013 expense and 2012 expense. Since this is a long-term assumption, as expected, there is little year-to-year movement. Figure 2. Inflation assumptions Averages Canada 2.16% 2.20% Germany 1.97% 2.03% Japan 1.05% 1.05% Netherlands 1.99% 1.99% Switzerland 1.42% 1.49% United Kingdom+ 2.88% 3.07% United States 2.59% 2.59% +RPI 2013 Global Survey of Accounting Assumptions Executive Summary I 2

4 Rates of Return The expected rate of return on assets is the long-term expectation of the annual earnings rate of the pension fund. Under ASC 715, the expected return on assets is a component of the benefit expense. Rates of return reflect the plan sponsor s outlook while considering the plan s asset allocation. Figure 3 shows the average allocations split among equities, bonds, property, cash and insurance contracts/other investments. The weighted average of the expected longterm rate of return on each class gives an indication of the appropriate expected return on assets assumption. In comparing results from last year s survey, we have witnessed minimal change in average asset allocations across the board. As expected, the plans in countries with higher equity allocations are those with well-established domestic stock markets for instance, companies in Canada, the U.K. and U.S., on average, hold large equity positions (more than 40%). Figure 4. Rates of return Averages Canada 6.14% 6.41% Germany 4.32% 4.57% Japan 2.42% 2.33% Netherlands 4.08% 5.01% Switzerland 3.44% 3.60% United Kingdom 6.11% 6.10% United States 7.19% 7.17% Figure 4 shows the average rates of return for 2013 and As we discuss in our full report, there is a positive correlation between countries with higher expected rates of return and the amount of plan assets that is held in equity funds. For the countries in Figure 4, there has been significant drop in the expected rate of return assumption for the Netherlands, with smaller drops in Canada, Germany and Switzerland. These have tended to be a reaction to the overall fall in bond yields and lower return expectations for assets in that category in the long term. Figure 3. Average asset allocation by country Canada Germany Japan Netherlands Switzerland United Kingdom United States 0% 20% 40% 60% 80% 100% Equities Bonds Property Cash Insurance/Other 2013 Global Survey of Accounting Assumptions Executive Summary I 3

5 Mortality Tables Figure 5. Life expectancy of a 60-year-old male Canada Germany Japan Netherlands Switzerland United Kingdom Projected Benefit Security Ratio The projected benefit security ratio is the ratio of the current market value of plan assets to the plan s projected benefit obligation. The projected benefit obligation is the actuarial present value of all benefits attributed by the benefit formula to service before the balance sheet date, including benefits based on expected future salary increases. Under IAS 19, this is known as the defined benefit obligation. Figure 6 shows the average projected benefit security ratio for 2013 and 2012 for funded plans in each country. During 2012, returns on equity markets and long-duration bonds were substantial. Investment gains (along with large contributions from sponsors) resulted in increased plan assets. However, market gains were mitigated by a growth in plan obligations due to the falling discount rates. United States Life Expectancy at Age 60 of a Male Currently Age 40 Life Expectancy at Age 60 of a Male Currently Age 60 Figure 5 shows the assumed life expectancy at age 60 for males currently ages 60 and 40. Note that some tables are generational, while others are static. The latter do not include an allowance for improvement in life expectancy. Thus, life expectancy at age 60 is the same for males currently ages 60 and 40. Figure 6. Projected benefit security ratio Averages Canada Germany Japan Netherlands Switzerland United Kingdom United States The majority of surveyed countries have implied life expectancies of between 20 and 25 years. The impact of the differences in this assumption varies depending on whether the typical payment form is lump sum or annuity Global Survey of Accounting Assumptions Executive Summary I 4

6 About the Survey The 2013 Global Survey of Accounting Assumptions for Defined Benefit Plans is the 24th annual Towers Watson survey of assumptions selected by major corporations for their defined benefit plans around the world. This report covers accounting assumptions under various global standards. For the full report, 52% of the survey participants report under ASC 715, 45% under IAS 19 and 3% under other similar accounting standards. We collected retirement plan data using a survey form and various Towers Watson databases that maintain accounting assumptions. Results in this report are shown on a plan-level basis. Therefore, some results could differ from what is reported on a company level. Towers Watson believes these surveys have elicited useful information, and we would be pleased to provide you with more detail. A snapshot of findings for a few key markets is available in this executive summary report. For more information, or to access the complete survey findings, please contact your Towers Watson consultant or: Americas: Tony Broomhead tony.broomhead@ Europe: Manjit Basi manjit.basi@ Asia Pacific: Phil Collins philip.collins@ The 1,280 companies in the full report have disclosed assumptions for their defined benefit plans. The report reflects data as of December 31, While this executive summary covers only Canada, Germany, Japan, the Netherlands, Switzerland, the U.K. and the U.S., the following 45 countries are represented in the full report: Argentina Australia Austria Belgium Brazil Canada Chile China Colombia Finland France Germany Greece Hong Kong* India Indonesia Ireland Italy Japan Korea (South) Luxembourg Malaysia Mexico Netherlands New Zealand Norway Pakistan Panama Philippines Poland Portugal Puerto Rico** Saudi Arabia Singapore South Africa Spain Sweden Switzerland Taiwan Thailand Turkey United Arab Emirates (UAE) United Kingdom United States Venezuela *Hong Kong is a special administrative region of China. **Puerto Rico is an unincorporated territory of the U.S. About Towers Watson Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of benefits, talent management, rewards, and risk and capital management. For more information, visit Global Survey of Accounting Assumptions Executive Summary I 5