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Setting ROAs for 2022: A guide for US corporate and public plans

Multiple authors
2022-10-31
Archived info
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

Key Points

  • Corporate plan ROAs are declining gradually, a trend we expect will continue due to several factors, including low yields and adoption of LDI strategies.
  • Revision activity in public plan ROA assumptions has picked up somewhat in recent years but is still slower than for corporate counterparts. The latest reported average ROA assumption is 7.1%.
  • In terms of capital market expectations, we continue to predict that long-term equity and bond returns will not keep pace with the returns of the last 50+ years.
  • We recommend that sponsors develop their investment policy based on their specific risk and return objectives and time horizon, rather than tying investment policy to a specific long-term ROA to manage pension expense or the reported liability.

AS PART OF THEIR YEAR-END REPORTING PROCESS, US corporate and public defined benefit (DB) plan sponsors must set an assumption for the long-term expected return on assets, or ROA. To help sponsors make more informed decisions, we provide this annual update on ROA assumptions, including our latest trend analysis and long-term capital market assumptions.

Corporate plans

Corporate sponsors use the ROA assumption to determine the pension expense recognized on their income statements. Under US accounting standards, the pension expense includes a credit (income) equal to the plan’s expected return on assets during the fiscal year.

The average ROA assumption reported by S&P 500 companies at year-end 2020 was 6.0%, about 30 basis points (bps) lower than in 2019 (see Figure 1 in PDF available below). This continues a downward trend. The average assumption has fallen 210 bps since 2006, when the introduction of mark-to-market balance sheet accounting for pension plans by the Financial Accounting Standards Board (FASB) and the passage of the Pension Protection Act by Congress first prompted many plan sponsors to reevaluate their investment…

To read more, please click the download link below.

Authored by
Amy Trainor
Amy Trainor, FSA
Multi-Asset Strategist
Boston
Jacqueline Yang
Jacqueline Yang, CFA
Investment Strategy Analyst
Boston
ian spencer
Ian Spencer
Investment Strategy Analyst
Boston

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All figures are for the Wellington Management Group of companies as at 30th June 2022.
Past performance is no guarantee of future performance and can be misleading.
Funds returns are shown net of fees.
Source: Wellington Management


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