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Survey Report

2018 Global Survey of Accounting Assumptions for Defined Benefit Plans: Executive Summary

Retirement|Pensions Risk Solutions|Investments|Pensions Corporate Consulting
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August 1, 2018

The 2018 Willis Towers Watson Global Survey of Accounting Assumptions for Defined Benefit Plans includes accounting assumptions from 1,193 companies in 44 countries.

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 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 2017.

Key findings

Our full report, which represents 1,193 companies with data from 44 countries, includes the following key findings:

  • Overall, we observed a decrease in corporate bond yields from last year-end for most countries. Meanwhile, government bond yields showed mixed trends worldwide, declining from last year-end for about half of the countries and increasing for the other half.
  • By year-end 2017 most countries realized slight improvements in their funding positions. During 2017, investment returns on plan assets (both bond and stock returns) showed a solid performance in major markets and, in most cases, this performance was able to offset declining interest rates.
  • The majority of surveyed countries imply life expectancies between 20 and 30 years. The impact of the differences in this assumption will vary depending on whether the typical payment form is lump sum or annuity. A majority of the Eurozone countries appear near the top of the list in the full report.

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 IAS 19 results for discount rates separately.

Figure 1 shows the average discount rates for benefit obligations at the end of 2017 and 2016, 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
  2018* 2017* 2018* 2017*
Canada 3.37% 3.55% 3.41% 3.69%
Germany 1.74% 1.70% 1.70% 1.56%
Japan 0.54% 0.56% 0.65% 0.53%
Netherlands 1.91% 1.87% 1.80% 1.76%
Switzerland 0.70% 0.68% 0.73% 0.69%
United Kingdom 2.47% 2.60% 2.50% 2.61%
United States 3.64% 4.08% 3.57% 4.02%

*For the purposes of this table, 2018 represents the discount rate assumption used for benefit obligations at the end of 2017, while 2017 represents the discount rate assumptions used for benefit obligations at the end of 2016.

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 – China, India 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 2018 and 2017 expense. Since this is a long-term assumption, as expected, there is little year-to-year movement. The exception is the United Kingdom, where the selection of the inflation assumption is more market-driven, referencing the implied inflation from comparing inflation-protected U.K. government bond yields with conventional U.K. government bond yields. There was however, little movement in that measure over the year.

Figure 2. Inflation assumptions: Averages
  2018 2017
Canada 2.02% 2.04%
Germany 1.79% 1.78%
Japan 1.39% 1.37%
Netherlands 1.79% 1.79%
Switzerland 1.07% 1.02%
United Kingdom* 3.19% 3.25%
United States 2.56% 2.56%

*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 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 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 a number of 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, Puerto Rico and the United States are holding relatively large equity positions (more than 40%). 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 2018 and 2017 expense for all plans reported under ASC 715 only. The lower expected rates of return assumptions in almost all of the developed countries for 2018 could possibly be attributed to a more conservative stance of 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
  2018 2017
Canada 5.25% 5.29%
Germany 3.61% 3.83%
Japan 2.46% 2.49%
Netherlands 2.75% 2.56%
Switzerland 2.45% 2.33%
United Kingdom 4.99% 5.08%
United States 6.57% 6.74%

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 at age 60 of between 20 and 30 years. The impact of the differences in this assumption will vary depending on whether the typical payment form is lump sum or annuity.

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 2018 and 2017, for funded plans in each country. By year-end 2017, most countries, including the seven shown in this executive summary, realized slight improvements in their funding positions. During 2017, investment returns on plan assets (both bond and stock returns) showed a solid performance in major markets and, in most cases, this performance was able to offset declining interest rates.

Figure 6. Projected benefit security ratio: Averages
  2018 2017
Canada 1.00 0.98
Germany 0.56 0.55
Japan 0.93 0.87
Netherlands 0.89 0.88
Switzerland 0.78 0.74
United Kingdom 1.01 0.93
United States 0.87 0.82

About the survey

The 2018 Global Survey of Accounting Assumptions for Defined Benefit Plans is the 29th annual Willis 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 this report, 57% of the survey participants report under ASC 715 and 43% under IAS 19 or other similar accounting standards.

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.

Willis 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. For further information, or to access the complete survey findings, please contact your Willis Towers Watson consultant or:

The 1,193 companies included in the full report have disclosed assumptions for their defined benefit plans. The report reflects data at or near the end of 2017. While this executive summary covers only Canada, Germany, Japan, the Netherlands, Switzerland, the United Kingdom and the United States, the following 44 countries are represented in the full report:

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

*Finland is 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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