Global Report: Global Survey of Retirement Plan Accounting Assumptions July 2014 This report presents the results of Aon Hewitt s global survey of accounting assumptions used for employee benefit plans at 2013 year-end. The results of this survey may be useful to companies when setting preliminary assumptions for 2014 year-end and budgets for 2015. In addition, companies should consider the following: At 2013 year-end, we noted that discount rates in most countries increased from 2012. However, the yields on corporate bonds have since declined by varying degrees in the countries with large pension liabilities (i.e., Canada, the Euro Zone, Switzerland, the United Kingdom, and the United States). Any planning for 2014 year-end or budgeting for 2015 should take these movements into consideration. The average expected rate of return on plan assets in many countries continues to decline due to increased allocations to fixed-income investments. For plan sponsors using International Financial Reporting Standards (IFRS), this decline will not affect their 2014 expense because the revised version of IAS 19, effective for fiscal years beginning in 2013, does not call for this assumption to be used. We are seeing companies, especially those with closed or frozen plans, establish a glide path as part of their investment and risk policy, with a view to automatically adjusting the risk level in the plans as market conditions vary. The glide path typically sets a specific asset allocation the investment manager must follow based on predefined triggers such as the funded status of the pension plan. If such a policy is applied, plan sponsors using U.S. GAAP should consider how the asset allocation in the relevant plans may vary when setting an assumption for the expected rate of return on assets. Most countries in which defined benefit plans are prevalent have mortality assumptions that recognize anticipated future mortality improvements. In February, new mortality assumptions were issued in preliminary form in the United States and in final form in Canada. A final version of the new United States mortality assumptions may be published before year-end. We anticipate that many plan sponsors will be adopting these new assumptions for 2014 year-end. For that reason, companies may want to assess the impact these assumptions will have on their retirement liabilities and review their own mortality experience. Changes in bond yields mentioned above may be due, in part, to changes in inflationary expectations. When plan sponsors consider a change in their discount rate, they should review other assumptions linked to inflation. Copyright 2014 Aon plc 1
Companies have been using additional ways to reduce the financial risks related to their pension plans, such as lump-sum windows, buy-ins, and longevity swaps. Lump-sum windows are typically temporary and offer members an opportunity to take a lump-sum payment in lieu of an annuity. Buy-ins are when the pension plan purchases an annuity contract as an investment but retains the ultimate obligation to pay benefits. Under IFRS, buy-ins are generally treated as investment decisions and not as settlements with the fair value of the annuity contract set equal to the related Defined Benefit Obligation. While the treatment is less clear under U.S. GAAP, we have, in general, not seen buy-ins trigger settlement accounting under U.S. GAAP either; however, the measurement of the annuity contract will generally differ from the IAS 19 approach with the Projected Benefit Obligation being set equal to the fair value of the annuity contract. Longevity swaps are contracts between the pension plan and an insurance company under which the insurance company agrees to take on the risk related to retirees living longer than is currently expected. We are not aware of any revisions to U.S. GAAP being contemplated; however, the International Accounting Standard Board (IASB) is expected to issue a proposed amendment to IAS 19 concerning the currency of the bonds to be used to determine the discount rate. We expect the amendment to state that both: 1) the bonds used to determine the discount rate; and 2) the depth of the bond market should be based on bonds that are denominated in the same currency as the plan s liabilities. The following topics have been or are being considered by the IFRS Interpretations Committee: Accounting for defined contribution plans with a guaranteed return This topic was dropped from the Committee s agenda, meaning that the various approaches practitioners have been using will continue for the time being. The limit on a balance sheet asset and how it would be affected by a trustee s right to increase benefits or wind-up a plan This topic will be considered at a future Committee meeting and may lead to future amendments to or interpretations of IAS 19. Re-measurement upon plan amendment or curtailment similar to U.S. GAAP This topic also will be considered at a future Committee meeting and may lead to future amendments to IAS 19 in the annual improvement cycle. If you would like an update on current economic indices or the current status of changes in accounting standards, please contact your local Aon Hewitt consultant. Copyright 2014 Aon plc 2
Background Aon Hewitt conducted this survey of fiscal 2013 year-end accounting assumptions by gathering information from our consultants and clients. Note that the U.S. information is based on Aon Hewitt s annual survey of assumptions used by its clients. As in previous surveys, we have focused on four economic assumptions that companies select under ASC 715, FRS 17, IAS 19, and other accounting standards with similar requirements for assumption setting. The assumptions are: Discount rate; Expected long-term rate of return; Salary increase; and Pension increase assumptions (for certain countries only). The majority of the reported measurement dates are December 31, 2013, but we also have included measurement dates from the end of September, October, and November. The tables on the following pages show the average rate for each assumption as of the end of 2012 and 2013. Copyright 2014 Aon plc 3
Discount Rate at 2013 The following table shows the survey results for the discount rate assumption for the 2012 and 2013 fiscal year-ends. 2013 Average 2013 Average Australia 4.31% 4.91% India 8.35% 9.10% Brazil 9.71 11.64 Indonesia 6.01 8.65 Canada 4.05 4.59 Japan 1.45 1.27 Euro Zone 3.32 3.39 Mexico 6.25 6.80 Austria 3.50 3.45 Norway 3.14 3.89 Belgium 3.14 3.10 Philippines 5.66 4.69 Cyprus 3.53 3.43 Poland 4.58 4.47 Finland 3.06 3.00 South Africa 7.86 8.83 France 3.20 3.20 South Korea 3.55 3.87 Germany 3.31 3.48 Sweden 3.13 3.63 Greece 3.26 3.26 Switzerland 1.92 2.24 Ireland 3.93 3.79 Taiwan 1.69 1.98 Italy 3.24 3.23 Thailand 3.86 4.43 Netherlands 3.38 3.51 Turkey 7.36 9.43 Spain 3.42 3.43 United Kingdom 4.43 4.44 United States 4.02 4.84 The values above represent an average discount rate for all post-employment plans (pension, retiree medical, and termination indemnities), as well as in-service benefits such as long-service leave or jubilee awards. A comparison of a company s discount rate to the rates shown above should take into consideration: 1) the maturity of the company s plan(s) may differ from the maturities of the plans included in this survey; and 2) some clients use yield curves which may support a higher discount rate while others may only refer to yields of indices. Copyright 2014 Aon plc 4
Long-Term Rate of Return for 2013 The following table shows the survey results for the average expected long-term rate of return on plan assets used to determine expense for the 2012 and 2013 fiscal years. 2012 Average 2013 Average 2012 Average 2013 Average Australia 6.58% 5.88% India 8.43% 8.59% Brazil 10.65 10.22 Japan 2.10 2.38 Canada 6.33 6.01 Mexico 7.27 6.96 Euro Zone 4.58 4.21 Philippines 7.15 6.72 Belgium 4.64 4.34 South Korea 3.90 3.71 France 4.02 4.09 Switzerland 3.31 3.23 Germany 4.52 4.20 Taiwan 2.14 2.18 Ireland 5.63 4.82 United Kingdom 7.76/3.96 7.48/4.31 Netherlands 4.63 4.12 United States 7.08 7.07 Spain 4.67 3.83 As noted on page 1, the concept of an expected return on plan assets no longer exists under IAS 19 it is set equal to the discount rate. For that reason, in this survey, we only included the 2013 expected return for companies reporting under U.S. GAAP. As a consequence, the number of countries in which we had credible data declined and the results for those countries with insufficient data were removed from this part of the survey. For other countries, the removal of companies reporting under IFRS changed the companies included in this part of the survey which may account for some of the movement seen from 2012 to 2013. For the United Kingdom, our 2013 year-end survey results produced an average expected return by asset class 7.48% for equities and 4.31% for corporate bonds. The expected rates of return shown above reflect the asset allocations of the plans included in this survey. A comparison of your company s expected rate of return to the rates shown above should take into consideration that the asset allocation for your company s plan(s) may differ from the asset allocations of the plans included in this survey. Copyright 2014 Aon plc 5
Salary Increase at 2013 The following table shows the survey results for the salary increase assumption for 2012 and 2013 fiscal year-ends. 2013 Average 2013 Average Australia 4.00% 3.69% India 8.57% 8.55% Brazil 7.14 7.59 Indonesia 7.80 8.10 Canada 3.21 3.23 Japan 2.16 2.18 Euro Zone 2.75 2.71 Mexico 5.23 5.22 Austria 2.86 2.89 Norway 3.27 3.57 Belgium 3.18 3.03 Philippines 6.41 6.45 Cyprus 3.24 3.49 Poland 3.18 3.13 Finland 2.84 2.66 South Korea 4.99 4.72 France 2.66 2.76 Sweden 3.08 2.97 Germany 2.64 2.59 Switzerland 1.89 1.87 Greece 2.78 2.47 Taiwan 3.21 3.20 Ireland 2.88 2.96 Thailand 5.93 5.60 Italy 2.99 2.90 Turkey 6.73 7.51 Netherlands 2.52 2.49 United Kingdom 3.30 3.53 Spain 2.88 2.76 United States 3.77 3.83 The salary increase assumptions shown above reflect the situation of each company included in this survey. Your company s situation may differ from that of the companies included in the survey; hence, a different salary increase assumption may be appropriate. Copyright 2014 Aon plc 6
Pension Increase for 2013 The following table shows the survey results for the pension increase assumption for 2012 and 2013 fiscal year-ends. Note that the results are shown for those plans where a portion of the benefits paid to pensioners is adjusted annually and is correlated with current inflationary expectations. 2013 Average Euro Zone 1.81% 1.83% Germany 1.89 1.85 Ireland 2.11 2.09 Netherlands 1.46 1.49 Norway 2.11 1.75 Sweden 1.90 1.91 Switzerland 0.54 0.57 United Kingdom 2.83 3.41/2.50 For the United Kingdom, our 2013 year-end survey results produced an average assumption of 3.41% for the Retail Price Index (RPI) and 2.50% for the Consumer Price Index (CPI). With the exception of Norway, the pension increase assumption remained relatively flat from 2012 to 2013. For Switzerland, a significant portion of the plans in our survey reported no assumption for pension increases. These plans were excluded from the averages shown above. If you would like further information on accounting assumptions for defined benefit plans, contact your local Aon Hewitt actuarial consultant, Chris Christiansen in Norwalk, Connecticut (+1 203 523 8458), or Kirsten Miller in Glasgow, Scotland (+44 7748 32 1976). Copyright 2014 Aon plc 7
About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit www.aonhewitt.com. Copyright 2014 Aon plc This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt's preliminary analysis of publicly available information. The content of this document is made available on an as is basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document. Copyright 2014 Aon plc 8