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Survey Report

2020 Global Survey of Accounting Assumptions for Defined Benefit Plans

Executive Summary

Investments|Retirement
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By Tony Broomhead , Mark O’Brien and Mark Mann | July 30, 2020

The 31st edition of our Global Survey of Accounting Assumptions for Defined Benefit Plans comprises 1,355 companies in 49 countries.

The 2020 Global Survey of Accounting Assumptions for Defined Benefit Plans is the 31st annual Willis Towers Watson survey of assumptions selected by major corporations for their defined benefit (DB) plans around the world.

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 tenure. 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 key economic assumptions in the determination of benefit costs under an accounting standard are the discount rate and inflation. Under ASC 715, there is another key economic assumption — the expected long-term rate of return on plan assets (for funded plans). In many countries, four additional economic assumptions, which are somewhat linked to inflation, can play a key role: rate of salary increase; rate of increase in pensions, both in deferment and in payment; cash balance interest crediting rate; and rate of increase in the social security parameters reflected in the pension benefit formula. We discuss these in our full report.

Although this survey mainly explores economic assumptions, we have again shown data regarding mortality assumptions, which are receiving closer attention because of increasing longevity.

The observations in this report reflect data at or near the end of 2019. Consideration should be given to market movements since December 31, 2019, particularly given the volatility seen so far this year. As discussions around accounting assumptions start for the 2020 year end, your Willis Towers Watson consultant would welcome the opportunity to discuss how that volatility might have affected your plans' liabilities and assets.

Key findings

Our full report, which represents 1,355 companies with data from 49 countries, includes the following key findings:

  • Overall, during 2019 we observed a clear downturn movement in both government and corporate bond yields from last year-end. Government bond yields decreased for 41 of the 43 countries covered, while corporate bond yields declined in all markets surveyed.
  • These bond yield movements translated into discount rates declines in all major markets. Although equity and bond markets showed a good performance during 2019, this was not always enough to counteract the negative impact on liabilities of lower discount rates. As a result more than half of the countries surveyed showed funding levels with slight decreases or unchanged compared to the previous year.
  • At year-end 2019 average expected rates of return for 2020 were generally lower compared to the previous year. Nevertheless, given recent events, these are poised to be reviewed in the current year.
  • Following recent changes in disclosure requirements, two new tables showing cash balance interest crediting rate assumptions and service cost as a percentage of pay were included in the full report this year.

Discount rates

Discount rates are used to calculate benefit obligations, and the service and interest cost portion of the employee benefit cost.

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 consistent with the benefit obligation.

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, IAS 19 requires the use of government bonds with no additional risk premium in such situations; therefore, we present discount rates for both accounting standards separately.

Figure 1 shows the average discount rates for benefit obligations at the end of 2019 and 2018, using ASC 715 and IAS 19. These tables include values for companies with December 31 balance sheet dates only.

Figure 1. Discount rates for benefit obligations — averages
*For the purposes of this table, 2020 represents the discount rate assumption used for benefit obligations at the end of 2019, while 2019 represents the discount rate assumption used for benefit obligations at the end of 2018.
Figure 1 shows the average discount rates for benefit obligations at the end of 2019 and 2018, using ASC 715 and IAS 19.
Averages — ASC 715 Averages — IAS 19
2020* 2019* 2020* 2019*
Canada 2.99% 3.63% 3.01% 3.65%
Germany 0.94% 1.75% 0.94% 1.75%
Japan 0.54% 0.55% 0.52% 0.61%
Netherlands 1.08% 1.89% 0.88% 1.71%
Switzerland 0.24% 0.90% 0.23% 0.99%
United Kingdom 1.93% 2.74% 1.96% 2.77%
United States 3.32% 4.30% 3.22% 4.21%

The similarity of ASC 715 and IAS 19 discount rates in most of the countries shown in Figure 1 reflects the fact 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 deep enough – Ecuador, Hong Kong, Mexico Poland and the United Arab Emirates, for instance – the average discount rate is noticeably lower under IAS 19 than under ASC 715.

For countries with a deep market in corporate bonds, it has become increasingly common to match expected cash flows from the plan either to a portfolio of bonds that generates sufficient cash flows or to a notional yield curve generated from available bond information. This is a common approach in Canada, the Eurozone, Japan, the U.K. and the U.S. and is becoming more common in Australia, Norway, Sweden and Switzerland.

Inflation

The assumption for long-term price inflation influences other economic assumptions, such as:

  • Rate of salary increase
  • 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
  • Cash balance interest crediting rate for some plans

Figure 2 shows the average inflation assumption for the 2020 and 2019 expense. For some developing countries, inflation has historically been very volatile, which has led some companies to select assumptions on a real basis (i.e., net of inflation). Most of the developed economies showed inflation rates that were broadly similar to last year’s. In the U.K. and Eurozone countries, inflation curves are often used to derive a plan’s inflation assumption.

Figure 2. Inflation assumptions — averages
*Retail Price Index
Figure 2 shows the average inflation assumption for the 2020 and 2019 expense.
2020 2019
Canada 2.03% 2.04%
Germany 1.76% 1.78%
Japan 1.34% 1.33%
Netherlands 1.72% 1.81%
Switzerland 1.09% 1.14%
United Kingdom* 3.01% 3.23%
United States 2.57% 2.67%

Expected rates of return

The expected rate of return on assets is the long-term expectation of the annual earnings rate on the assets of the pension fund. Under ASC 715, the expected return on assets is a component of the employee benefit cost. Expected rates of return reflect the plan sponsor’s outlook based on the plan’s asset allocation.

Figure 3 shows the average allocation split among equities, bonds, property, cash and insurance contracts/other investments. The weighted average of the expected long-term rate of return on each class gives an indication of the appropriate expected return on assets assumption. In comparing with results from last year’s survey, we witnessed only minor changes in asset allocations across the board.

Asset allocations are likely to be driven by several factors, such as funded status, sponsor risk appetite, nature and maturity of the obligations, and local regulations. The complete results show that sponsors in Australia, Hong Kong, New Zealand and the United States are holding relatively large equity positions (more than 40%). Bangladesh, Brazil, India, Indonesia, Mexico and Taiwan are countries where regulatory investment restrictions influence their asset mix.

Figure 4 shows the average expected rates of return for 2020 and 2019 expense for all plans reported under ASC 715 only. The lower expected rates of return assumptions in almost all the developed countries for 2020 could possibly be attributed to a more conservative stand by pension sponsors regarding the fixed income and equity markets returns in the future. As expected, there is a positive correlation between expected rate of return and the amount of plan assets held in equities by plan sponsors.

Figure 4. Expected rates of return — averages
Figure 4 shows the average expected rates of return for 2020 and 2019 expense for all plans reported under ASC 715 only.
2020 2019
Canada 4.79% 5.20%
Germany 3.45% 3.60%
Japan 2.38% 2.54%
Netherlands 1.86% 2.63%
Switzerland 2.67% 2.98%
United Kingdom 4.21% 4.77%
United States 6.15% 6.49%

Mortality tables

Figure 5 shows the assumed life expectancy at age 60 for both a male currently age 60 and a male currently age 40. Note that some tables are generational, while others are static. The latter do not include an allowance for improvement in life expectancy for future employee cohorts; thus, life expectancy at age 60 is the same for a male currently age 60 and a male currently age 40.

The majority of surveyed countries have implied life expectancies of between 20 and 30 years. The impact of the differences in this assumption will vary depending on the payment form (lump sum or annuity), form of the annuity and the mix of current plan participants among other factors.

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 2020 and 2019, for funded plans in each country. Overall, ratios either improved only slightly or remained broadly unchanged for the countries shown below. However for the full survey, the majority of countries showed funding levels with slight decreases.

Figure 6. Projected benefit security ratio — averages
Figure 6 shows the average projected benefit security ratio for 2020 and 2019, for funded plans in each country.
2020 2019
Canada 0.99 1.00
Germany 0.58 0.56
Japan 0.95 0.92
Netherlands 0.90 0.90
Switzerland 0.79 0.79
United Kingdom 1.02 1.03
United States 0.90 0.87

About the survey

The 2020 Global Survey of Accounting Assumptions for Defined Benefit Plans is the 31st annual Willis Towers Watson survey of assumptions selected by major corporations for their DB plans around the world.

The full report covers accounting assumptions under various global standards; for this report, 54% of the survey participants report under ASC 715 and 46% under IAS 19 or other similar accounting standards. This is similar to the mix of participants last year.

We collected retirement plan data using a survey form and various Willis Towers Watson databases that maintain accounting assumptions. Results in the full report are shown on a plan-level basis. Therefore, some results could differ from what is reported on a company level.

The 1,355 companies included in the full report have disclosed assumptions for their DB plans. The report reflects data at or near the end of 2019. While this executive summary covers only Canada, Germany, Japan, the Netherlands, Switzerland, the United Kingdom and the United States, the following 49 countries are represented in the full report:

  • Argentina
  • Australia
  • Austria
  • Bangladesh
  • Belgium
  • Brazil
  • Canada
  • Chile
  • China
  • Colombia
  • Costa Rica*
  • Ecuador
  • Finland*
  • France
  • Germany
  • Greece
  • Hong Kong**
  • India
  • Indonesia
  • Ireland
  • Israel*
  • Italy
  • Japan
  • Luxembourg
  • Malaysia
  • Mexico
  • Netherlands
  • New Zealand
  • Norway
  • Pakistan
  • Panama*
  • Philippines
  • Poland
  • Portugal
  • Puerto Rico***
  • Saudi Arabia
  • Singapore
  • South Africa
  • South Korea
  • Spain
  • Sri Lanka
  • Sweden
  • Switzerland
  • Taiwan
  • Thailand
  • Turkey
  • United Arab Emirates (U.A.E.)
  • United Kingdom
  • United States

*Costa Rica, Finland, Israel and Panama are new to this year’s report
**Hong Kong is a special administrative region of China.
***Puerto Rico is an unincorporated territory of the United States.

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