PBAS Topics. Capetown, November 2016

Transcription

1 PBAS Topics Capetown, November 2016

2 Topics Update on Split Discount rates Regulatory/auditor status Survey Slides 4-9 are previously presented and are included here only as background Appropriate corporate discount rate curves under IFRS

3 Split Discount Rates Two approaches are commonly referred to as split discount rate: Separate single discount rates for service cost and interest cost (dual rate approach) In calculating interest cost, multiply each year s cash flow by the appropriate rate on the discount curve ( spot rate approach, also known as AT&T approach )

4 Dual Rates Typically reduces service cost relative to the standard approach Longer liability duration => higher bond yields for discounting

5 Example Years TRADITIONAL APPROACH: Cash flows discounted using the total PBO discount rate SPLIT DISCOUNT RATE APPROACH: Separate SC discount rate developed from cash flows discounted using the spot rate curve* Savings of $0.3 in Service Cost in this case (3% SC savings) , % 1, % , % 3, % , % 5, % , % 6, % , % 11, % Total SC valued at 12/31/ M 10.0M Single weighted average discount rate 4.20% 4.38% Savings of $0.3 in Service Cost in this case (3% SC savings)

6 Spot rate approach Typically reduces both service cost and interest cost relative to the standard approach as long as the yield curve is upward sloping Can increase expense in the rare case where the yield curve is inverted

7 Example Year (a) Year-End Pension Plan Cash Flows (b) Spot Rates (c) Pension Plan Cash Flows Discounted at Spot Rates (d) = (b) x (c) Interest at Spot Rates % % % % % Total PBO 12/31/2014 Discount rate 1.65% 2, Interest Cost with traditional approach = 45.6 (2,762.4 X 1.65%) Savings of $4.4 in Interest Cost in this case (10% IC savings)

8 American Academy Paper (no. 1) What does current yield curve say about next year s curve? Given assumption as to next year s curve, what interest method produces no gain/loss Spot rate approach just one of a family of approaches

9 Accounting Issues Is the approach acceptable under accounting standards Can it be used in conjunction with a bond model Is it a change in method or estimate or

10 Status US GAAP Yield Curve SEC accepts spot rate approach if using a yield curve Not a change in method Auditors ok with separate rate for service cost

11 Status US GAAP Bond Model Mercer developed a white paper to demonstrate reasonableness of one possible approach to using a bond model with spot rates Big 4 agreed and co-presented to SEC SEC rejected for reasons not entirely clear Academy preparing a second white paper to demonstrate other approaches Acceptability of dual rate approach to auditors not clear

12 Status IFRS Depends on country and audit firm Dual rate approach seems to be widely accepted Spot rate approach less common, but seems to be accepted more times than not in US.

13 IAA Survey Results US-GAAP: PWC survey of Fortune 100 and other large co s on CY 2015 y/e filings: 25% had adopted SRA for interest cost WTW survey of Fortune 1000 filings on Q filings suggest that 50% of those reporting for DB plans had adopted SRA for interest cost Milliman survey of biggest 100 DB plans suggest approx. 40% Considering: Large companies are more likely to adopt than small companies More companies who have adopted spot rates since then Estimating, we expect that overall 25-50% are currently using SRA; the proportion is expected to increase significantly for CY 2016 y/e filings

14 IAA Survey Results IFRS: estimated proportion of companies using SRA (guesstimates except for Canada): Australia : ~ ξ % Canada : ~ 5-10 % (increasing; AON survey of large co s 2015) Finland : ~ ξ % Germany : ~ ξ % Japan : ~ ξ % Mexico : ~ ξ % Spain : ~ ξ % Switzerland : ~ ξ % UK : ~ ξ % Note: ξ indicates a negligible amount, greater than zero (i.e. a handful )

15 IAA Survey Results Information made available by: Jim Verlautz (US) Urs Barmettler (CH) Yas Fujii (Japan) Tim Furlan (Australia) Charles Cowling (UK) Jason Malone (Canada) Octavio Maupomé (Mexico) Pentti Soininen (Finland) Francisco Gonzalez-Quevedo (Spain) Alf Gohdes (Germany)

16 Corporate Bond Discount Rate Approaches Under IFRS What does discount rate represent under IFRS? Not a settlement rate Otherwise undefined. Defeasement? Standard yield curve (all issues meeting acceptability criteria) OK Above median curves not OK Bond models not OK

17 Why not OK? Per Big 4, they re biased Per IAS 19 par 77, unbiased assumptions are neither imprudent or excessively conservative Per US actuarial standards, an assumption is reasonable if it has the following characteristics (e) It has no significant bias (i.e., it is not significantly optimistic or pessimistic) Not defined in ISAPs

18 Are they biased in outcome? Consistent use of the same discount rate approach in unchanging markets will not produce a gain or loss If no gain or loss, then neither imprudent or conservative.

19 Are they biased in approach? Approach to setting discount rate established in IAS 19 par Those paragraphs do not mention bias All three approaches comply with those paragraphs

20 Questions 1. Are auditors playing actuary, and not doing it well? 2. Should IAA be doing anything with this?