Industry News

On July 8, 2020, the American Academy of Actuaries (AAA) published its issue brief, Asset Allocation and the Investment Return Assumption.  According to the brief, “The expected investment return for a pension plan’s assets used as the discount rate for public and multiemployer pension plan valuations is sometimes referred to as the “actuarial” rate of return.  This assumption often has a greater impact on the pension liability than any other assumption.”  The brief discusses why the investment return assumption is typically determined by the asset allocation, rather than the reverse.

Other key highlights include:

• Asset allocation is determined in accordance with a plan’s investment policy that identifies the objectives, duties, policies, and procedures related to the plan investments. 
• The level of investment risk should be consistent with the objectives of plan sponsors and fiduciaries.
• After the asset allocation is set, then the assumption for the expected return can be determined.
• The investment return assumption used to measure pension liabilities is sometimes treated as a return target for determining the pension plan’s asset allocation, which may lead to increased investment risk.
• Generally, investment risk should be reduced as a plan matures.

The brief concludes, “Analysis focused on the potential for unexpected changes in contribution requirements and the implications for benefit security provide the basis for sound asset allocation decisions.  The investment return assumption can then be determined based on an asset allocation that results in an appropriate amount of risk.”

The brief is available here.