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2019 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 | September 23, 2019

The 30th edition of our Global Survey of Accounting Assumptions for Defined Benefit Plans comprises 1,303 companies in 45 countries.

Executive summary

The 2019 Global Survey of Accounting Assumptions for Defined Benefit Plans is the 30th 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, three additional economic assumptions, which are generally linked to inflation, can play a key role: rate of salary increase; rate of increase in pensions, both in deferment and in payment; 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 2018. Consideration should be given to market movements since December 31, 2018, particularly given the volatility seen so far this year in terms of bond yields and asset returns. As discussions around accounting assumptions start for the 2019 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 1,303 companies with data from 45 countries, includes the following key findings:

  • Overall, we observed mixed trends worldwide for both corporate and government bond yields from last year-end. Government bond yields increased for 19 countries while decreasing for 21 countries. Corporate bond yields increased for three countries (in addition to the Eurozone countries) while decreasing for five countries.
  • Funding ratios stood at similar levels as last year, aided by an increase in discount rates in several major markets, most notably the U.K. and U.S., which offset lower than expected investment returns
  • While there has been a general increase in assumed life expectancy over the past 10 years, recent assumptions in the U.K. and U.S. have shown a slight downturn, with life expectancy at age 60 decreasing from 27.6 in 2016 to 26.7 in 2018 for U.K. plans and from 26.1 in 2014 to 25.0 in 2018 for U.S. plans

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.

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 when determining discount rates for countries where there is no deep corporate bond market; therefore, we present discount rates for both accounting standards separately.

Figure 1 shows the average discount rates for benefit obligations at the end of 2018 and 2017, 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
Averages: ASC 715 Averages: IAS 19
2019* 2018* 2019* 2018*
Canada 3.63% 3.37% 3.65% 3.41%
Germany 1.75% 1.74% 1.75% 1.70%
Japan 0.55% 0.54% 0.61% 0.65%
Netherlands 1.89% 1.91% 1.71% 1.80%
Switzerland 0.90% 0.70% 0.99% 0.73%
United Kingdom 2.74% 2.47% 2.77% 2.50%
United States 4.30% 3.64% 4.21% 3.57%

*For the purposes of this table, 2019 represents the discount rate assumption used for benefit obligations at the end of 2018, while 2018 represents the discount rate assumptions used for benefit obligations at the end of 2017.

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 — Hong Kong, Mexico and Poland, 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 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

Figure 2 shows the average inflation assumption for the 2019 and 2018 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), whereas 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
2019 2018
Canada 2.04% 2.02%
Germany 1.78% 1.79%
Japan 1.33% 1.39%
Netherlands 1.81% 1.79%
Switzerland 1.14% 1.07%
United Kingdom* 3.23% 3.19%
United States 2.67% 2.58%

*Retail Price Index

Expected 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 rate of 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.

About the survey

The 2019 Global Survey of Accounting Assumptions for Defined Benefit Plans is the 30th annual Willis Towers Watson survey of assumptions selected by major corporations for their DB plans around the world.

This report covers accounting assumptions under various global standards. For this report, 55% of the survey participants report under ASC 715 and 45% 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 this report are shown on a plan-level basis; therefore, some results could differ from what is reported on a company level.

The 1,303 companies included in the full report have disclosed assumptions for their DB plans. The report reflects data at or near the end of 2018. While this executive summary covers only Canada, Germany, Japan, the Netherlands, Switzerland, the United Kingdom and the United States, the following 45 countries are represented in the full report:

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

*Bangladesh and Sri Lanka are new in 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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