2015 Study of
Economic Assumptions
Used for ASC 715 purposes
Contents
1Introduction
2
Prevailing interest rates
3
Measurement date
4
Discount rate assumption
6
Salary increase assumption
7
Expected return assumption
9
Funded status
10
Health care cost trend rate assumptions
12
For more information
2015 Study of Economic Assumptions 2
2012
Introduction
Under the FASB Accounting Standards Codification
(ASC),the sponsor of a defined benefit pension plan is
required, in measuring the plan’s obligations and annual
expense, to use assumptions that (1) are explicit (ASC
715-30-35-42) and (2) are “consistent [with each other]
to the extent that each reflects expectations of the same
future economic conditions” (ASC 715-30-35-31). In
general, the benefit obligation is most sensitive to the
discount rate assumption; for example, a relatively small
change in the discount rate (of, say, 25 basis points) could
result in a change in the benefit obligation on the order of,
perhaps, 2 to 4 percent.
ASC 715-60-35-79 and 35-80 outline similar requirements
for the selection of assumptions for other postretirement
employee benefit (OPEB) plans.
ASC 715-30-35-43 describes the method of selecting
the discount rate. The discount rate “shall reflect the
rates at which the pension benefits could be effectively
settled.” ASC 71 5-30-35-44 notes that the discount
rate should reflect the yield of a portfolio of high-quality
fixed-income instruments whose coupons and maturities
match projected benefit payments. However, ASC 715-3035-1 allows the use of computational shortcuts that are
expected to produce results that are not materially different
from those resulting from a more detailed analysis. Because
the duration of a plan’s benefit obligation is affected by
the plan design and by the demographic characteristics of
the plan population (e.g., average age, average service,
proportion of retirees), one might generally expect that
plans with similar plan designs and demographics would
use similar discount rates. Conversely, one might expect
that plans with dissimilar plan designs or demographics
may not use similar discount rates.
In this study, Deloitte’s Human Capital service area has
compiled information disclosed by many of the Fortune
500 companies in their most recent annual reports. We
have focused on 287 companies that sponsor pension or
other postretirement benefits in the U.S. and that have
calendar fiscal years. Of these, 278 companies disclosed
information about defined benefit plans. Information
about OPEB (subject to ASC 715-60) was disclosed by
250 companies, including eight that disclosed only OPEB
arrangements. The disclosure information also included
assumptions the companies used as of the prior year,
enabling us to compare changes in the assumptions from
one year to the next.
Companies must also disclose other economic
assumptions: the expected rate of return on plan assets,
the expected rate of salary increases, and the expected
increase in health care costs.
Although the selection of assumptions should be specific
to the individual plan, plan sponsors, as well as regulators,
often compare their discount rate and other assumptions
to those of other plan sponsors.
Of course, there may be circumstances — such as a
relatively flat yield curve — in which plans with dissimilar
plan designs or demographics would be able to support
similar discount rates. In summary, the process an entity
uses to select the discount rate should take into account
the facts and circumstances specific to the plan as well
as the high-quality corporate bond yield rates as of the
measurement date.
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and regulations of public accounting.
2015 Study of Economic Assumptions 1
Prevailing interest rates
The SEC staff has commented about the guidance on
the selection of the discount rate, noting that it believes
that the term “high-quality” refers to those fixed-income
instruments with at least an Aa3 rating from Moody’s (or
its equivalent from another rating service). Exhibit 1 shows
the Citigroup Pension Discount Curve as of as of year-end
2013, year-end 2014, and July 31, 2015.
This exhibit1 indicates that the yields at year-end 2014
are lower than at year-end 2013 for almost all maturities.
However, it also shows the Citigroup Pension Discount
Curve as of July 31, 2015, which indicates that rates have
increased across most maturities since year-end 2014.
Data from Citigroup Global Capital Markets
1
Exhibit 1: Citigroup Pension Discount Curve
6%
5%
Spot Rate
4%
3%
2%
7/31/15
12/31/14
1%
12/31/13
0%
0
5
10
15
20
25
30
Maturity (Years)
2015 Study of Economic Assumptions 2
Measurement date
Over the past several years, the rates available on corporate
bonds as suggested by published indices such as Merrill
Lynch U.S. Corporates Aa 15+ years, Merrill Lynch U.S.
Corporates Aa/Aaa 10+ years, as well as Citigroup’s
(formerly Salomon’s) Pension Liability Index have varied
considerably. The historic yields over the past several years
for these indices are plotted in Exhibit 2.
This exhibit indicates that these indices experienced
decreases during 2014, and finished the year approximately
85–100 basis points lower as compared to the end of
2013. Furthermore, Exhibit 2 indicates that rates are
currently (as of the end of August 2015) higher than at the
end of 2014.
Exhibit 2: Corporate Bond Month-End Index Rates
Effective Annual Yield
Measurement Date
2015 Study of Economic Assumptions 3
Discount rate assumption
If a registrant uses published long-term bond indices as a
benchmark for its assumptions, it is expected to explain
how it determined that the timing and amount of cash
outflows related to the bonds included in the indices
matches its estimated defined benefit payments. If there
are differences between the terms of the bonds and the
terms of the defined benefit obligations (e.g., if the bonds
are callable), the registrant is expected to explain how it
adjusts for the difference. Increases to the benchmark
rates should not be made unless the registrant has detailed
analysis that supports the specific amount of the increase3.
On average, discount rates decreased by around 80
basis points from December 31, 2013 to December 31,
2014. One hundred percent of companies decreased this
assumption from year end 2013.
50%
December 31, 2014
47%
December 31, 2013
45%
40%
Percentage of respondents
The FASB and SEC staffs have indicated that they expect
discount rates to move with general economic trends2.
Exhibit 4 presents the change from December 31, 2013 to
December 31, 2014. The SEC staff has further indicated
that it expects companies to disclose the basis for the
selection of the discount rate. Companies that rely on an
index to support their selection of the discount rate are
further expected to provide evidence that such index is
appropriate for the particular plan.
Exhibit 3: Discount Rates for Disclosures
36%
35%
31%
30%
24%
25%
20%
19%
20%
15%
10%
5%
0%
8%
7%
1%
3.50%
3.75%
3%
2%
0%
4.00%
4.25%
2%
4.50%
0%
0%
4.75%
5.00%
0%
5.25%
Rate
45%
Exhibit 4: Change in Discount Rate
40%
70%
% Total
59%
60%
Percentage of respondents
Exhibit 3 summarizes the discount rate for ASC 715-30
purposes disclosed as of December 31, 2014, and
December 31, 2013. The average discount rate disclosed
as of December 31, 2014, was 3.97 percent, about 80
basis points below the average discount rate disclosed by
these companies at the end of 2013. Ninety-one percent
of the companies included in this study were between 3.75
percent and 4.25 percent. The spread of discount rates
stayed relatively constant compared to the prior year.
50%
40%
30%
30%
20%
8%
10%
2%
1%
0%
-125
-100
-75
-50
-25
0%
0
Basis points
ASC 715-20-S99-1 (formerly EITF Topic D-36)
Cf.Section II H 1 at www.sec.gov/divisions/corpfin/
acctdis030405.htm.
2
3
2015 Study of Economic Assumptions 4
Exhibit 5: Difference in Discount Rate for ASC 715-60 Purposes and ASC 715-30 Purposes
60%
Percentage of respondents
We also compared the discount rate disclosed for
ASC 715-60 purposes with that disclosed for measuring
pension liabilities in accordance with ASC 715-30. As
shown in Exhibit 5, 48 percent of the companies included
in this study disclosed the same discount rate for both
measurements, comparable to the percentage in last year’s
study. Seventeen percent of companies disclosed a higher
discount rate for measuring postretirement benefits than
for measuring pension benefits, while 35 percent used a
lower discount rate.
% Total
48%
50%
40%
30%
24%
20%
0%
9%
7%
10%
2%
2%
-100
-75
6%
2%
-50
-25
0
2
50
75
Basis points
45%
42%
2015 Study of Economic Assumptions 5
Salary increase assumption
December 31, 2014
25%
December 31, 2013
23%
21%
Percentage of respondents
The range of assumed salary increase is fairly wide, as
summarized in Exhibit 6. The average salary increase
assumption disclosed as of December 31, 2014, was
roughly 3.75 percent, a decrease of 6 basis points from
2013. Sixty-two percent of the companies included in
this study used an assumption between 3.50 and 4.50
percent. Exhibit 7 shows the change in the salary increase
assumption from December 31, 2013, to December 31,
2014. Similar to last year, between these two measurement
dates, 77 percent of the companies included in this study
reported no change in the salary increase assumption.
Roughly 14 percent decreased this assumption.
Exhibit 6: Salary Increase Disclosures
20%
15%
13% 13%
13% 13%
11% 11%
10% 10%
9%
10%
7%
7%
6%
5%
5%
0%
4% 4% 4%
3%
2%
1%
3%
3% 3%
1% 0%
2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 5.00% 5.25% 5.50%
Salary increase assumption
Exhibit 7: Change in Salary Increase Assumption
30%
90%
% Total
77%
80%
Percentage of respondents
Plans that provide pay-related benefits are required to
disclose the salary increase assumption underlying the
measurements. Most of the companies in the study
disclosed a salary increase assumption. ASC 715-30
provides relatively little guidance on the selection of the
salary increase assumption. However, ASC 715-30-35-31
notes it should reflect “future changes attributed to general
price levels, productivity, seniority, promotion, and other
factors.”
70%
60%
50%
40%
30%
20%
10%
0%
4%
4%
6%
-75
-50
-25
5%
0
Basis points
25
2%
2%
50
75
2015 Study of Economic Assumptions 6
Expected return assumption
Under ASC 715-30-20, the expected long-term rate of
return (i.e., expected return assumption) should reflect “the
average rate of earnings expected on the funds invested
or to be invested to provide for the benefits.” Furthermore,
ASC 715-20-50-1(d) requires that plan sponsors provide
a narrative description of both a plan’s actual investment
policy and the basis they used to determine the overall
expected long-term rate of return. As a result, companies
with different asset allocations or different investment
philosophies may have different long-term return
assumptions.
We understand that some companies therefore engage in
a process (with varying degrees of rigor) for developing the
expected return assumption.
One method for determining the expected return
assumption is based on a “building block” approach. In
our experience, the building block approach is used by
many in the investment management industry to develop
capital market expectations. This approach begins with the
development of a long-term level of expected inflation.
The level of inflation becomes the “building block” for the
development of expected returns for each of the various
asset classes (i.e., the difference between real and nominal
returns).
Next, companies develop an expected return on cash (“risk
free” asset), typically by using 90-day Treasury bills as a
proxy. Risk premiums above cash are developed as the
primary determinant of expected return for the various
asset classes (e.g., U.S. equities, U.S. core fixed income)
included in the portfolio. Risk premiums should reflect the
risk of each asset class (the riskier the asset class, the larger
the risk premium).
Finally, under the building block approach, companies
calculate the expected return of the total portfolio by using
the asset class returns developed, taking into account the
overall strategic asset allocation of the portfolio. Some
companies engaging in active investment management
may be able to document a premium for this strategy
and may choose to incorporate a return premium to
reflect their belief that active management will provide
an additional incremental return. Note that management
fees for actively managed investments are typically higher
than passively managed products and that the premium
assigned for active management should be net of
additional investment management fees.
Another approach to developing the long-term rate of
return assumption is to develop a consensus forecast,
whereby the company gathers long-term capital market
forecasts from multiple, reputable organizations in the
financial services industry (such as investment consultants,
investment managers, or other financial institutions).
Typically, these capital market forecasts include long-term
expected return assumptions for various asset classes. The
company can calculate the expected return of the portfolio
by “averaging” the expected return forecasts gathered by
asset class and using these inputs to calculate the total
expected return on the overall portfolio.
Alternatively, some companies may choose to determine
the projected range of returns for the overall portfolio by
using stochastic simulation. Stochastic simulation is a tool
that allows the company to forecast the overall portfolio
return under various potential economic environments.
The inputs to the model typically include mean-variance
assumptions for each asset class (which can be generated
by using the building block method or consensus forecast)
as well as assumptions related to future levels of inflation
and interest rates. The results of the stochastic simulation
will provide the company with the range of potential
returns for the portfolio over a long-term horizon (although
it is worth noting that the output of the analysis is largely
predicated upon the assumptions).
2015 Study of Economic Assumptions 7
Fiscal 2014
Fiscal 2013
25%
Percentage of respondents
The average expected return was 7.10 percent for 2014
(roughly 5 basis points lower than that for 2013), with 61
percent of companies between 7.00 and 8.00 percent.
Thirty-one percent were less than 7.0 percent and 8
percent were higher than 8.0 percent. As shown in Exhibit
9, compared with 2013, approximately 31 percent of
companies lowered this assumption in 2014, 60 percent of
the companies kept the same assumption as 2013 and the
remaining 9 percent raised the assumption. Our analysis
also shows that larger plans used a somewhat higher (by
as much as 50 basis points on average) expected return
assumption. This difference could be due to many reasons,
including more aggressive asset strategies, lower expense
ratios, or different investment opportunities.
Exhibit 8: Expected Long-Term Rate of Return Assumption
20%
20%
18%
15%
15%
10%
5%
0%
10%
8%
8%
3%
12%
11%
11%
10%
4% 4%
3%
5%
8%
8%
11%
7%
6%
3%
4%
4%
2%
3%
2%
5.75% 6.00% 6.25% 6.50% 6.75% 7.00% 7.25% 7.50% 7.75% 8.00% 8.25% 8.50% 8.75%
Rate of return
Exhibit 9: Change in Expected Long-Term Rate of Return Assumption
25%
From 2013 to 2014
70%
60%
60%
Percentage of respondents
Exhibit 8 shows the range of the expected return used in
measuring pension expense for 2014 and 2013. While
ASC 715-60 has a similar definition, many OPEB plans are
unfunded; this assumption is not used for unfunded plans.
50%
40%
30%
20%
12%
15%
10%
0%
1%
1%
2%
-125
100
75
-50
-25
0
3%
2%
2%
2%
25
50
75
100
Basis points
2015 Study of Economic Assumptions 8
Funded status
Exhibit 10: Funded Status Percentage
December 31, 2014
December 31, 2013
20%
19%
18%
Percentage of respondents
Exhibit 10 shows the change in funded status (measured as
the ratio of market value of assets to the projected benefit
obligation) from December 31, 2013, to December 31,
2014. The funded status of the plans as of the end of
2014 averaged approximately 81 percent, a decrease of
8 percent compared to 2013. Last year, approximately 38
percent of companies had a funded status of at least 95
percent; this year, 18 percent.
16%
16%
16%
14%
14%
12%
12%
13%
12%
10%
8%
6%
16%
9%
8%
7%
9%
8%
8%
6%
5%
4%
4%
2%
2%
0%
9%
60%
65%
3%
2%
70%
75%
80%
85%
90%
95%
100%
2%
105%
110%
Funded percentage
2015 Study of Economic Assumptions 9
Health care cost trend
rate assumptions
Thirty-six percent of the companies used the same rate as
the prior year (as shown in Exhibit 12). Two percent used
a higher initial trend, and the remaining plans disclosed a
lower trend assumption. Eight percent decrease their initial
rate by 100 basis points or more.
December 31, 2014
December 31, 2013
70%
58%
60%
Percentage of respondents
As of December 31, 2014, 82 percent of the companies
disclosed an initial health care cost trend assumption of
between seven percent and eight percent. The average
initial trend rate was 6.97 percent, down from the 7.22
percent disclosed for the prior year. A comparison of the
current and prior year is shown in Exhibit 11.
Exhibit 11: Initial Health Trend Assumption
48%
50%
40%
33%
30%
24%
20%
12%
8%
10%
0%
1% 1%
3% 3%
4%
5%
7%
2%
6%
7%
8%
0% 0%
9%
10%
Initial Health Trend Assumption
Exhibit 12: Change in Initial Health Trend Assumption
60%
% Total
54%
50%
Percentage of respondents
ASC 715-60-35-99 describes the health care cost trend
assumption as representing “the expected annual rates
of change in the cost of health care benefits… for
each year from the measurement date until the end of
the period in which benefits are expected to be paid.”
ASC 715-60‑35‑100 notes that “health care cost trend
rates may be assumed to continue at the present level for
the near term, or increase for a period of time, and then
grade down over time to an estimated health care cost
trend rate ultimately expected to prevail.”
40%
36%
30%
20%
10%
6%
2%
0%
-150
-100
-50
0
1%
1%
50
100
Basis Points
70%
2015 Study of Economic Assumptions 10
December 31, 2014
December 31, 2013
70%
65%
61%
60%
Percentage of respondents
Exhibit 14 compares the difference between the initial and
ultimate trends at year-end 2014 compared with year-end
2013. Over the year, on average this difference narrowed
slightly from 2013 to 2014 (from 238 basis points in 2010
to 217 basis points in 2014).
Exhibit 13: Ultimate Health Trend Assumption
50%
40%
32%
28%
30%
20%
10%
0%
2% 2%
1% 0%
4.00%
4.25%
4% 3%
4.50%
4.75%
0%
5.00%
0%
0%
5.25%
2%
5.50%
Ultimate Trend Assumption
Exhibit 14: Difference Between Initial and Ultimate Health Trends
December 31, 2014
December 31, 2013
40%
36%
35%
Percentage of respondents
Exhibit 13 summarizes the ultimate health care cost trend
disclosed as of December 31, 2014. At the end of 2014,
the average ultimate health care cost trend rate was
roughly 4.80 percent, slightly lower than that disclosed at
the end of the prior year.
29%
30%
28%
27%
25%
20%
17%
14%
15%
10%
10%
6%
5%
0%
2% 2%
0
9%
4%
4%
6%
1% 1%
50
1%
100
150
200
250
300
350
2%
400
0%
1%
450
Basis Points
December 31, 2013
December 31, 2012
2015 Study of Economic Assumptions 11
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2015 Study of Economic Assumptions 12
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2015 Study of Economic Assumptions 13
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