- Portfolio Manager and LDI Strategist
United States, Institutional
Change
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Key points
- Corporate plan ROA assumptions increased again in 2024, the most recent year reported. We believe they could stabilize from here given that capital market return assumptions are generally a touch lower for equities compared to last year, while assumed long bond returns are slightly higher.
- Public plan ROA assumptions, on average, were unchanged from the prior year at 6.9%. The average assumption has leveled off in recent years after several years of notching down slowly.
- In terms of capital market assumptions, 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 Russell 3000 companies at year‑end 2024 was 6.0%, which was 15 bps higher than the average in 2023. This is on the back of a 65 bps increase in 2023, which reversed a 15-year downward trend and was primarily the result of higher capital market assumptions. Still, the average ROA assumption is 190 bps lower than in 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 strategies.
The distribution of ROA assumptions sheds additional light on the long-term decline in the average assumption. In 2006, just over 10% of companies selected an ROA assumption below 7.0%. But by 2024, nearly 80% of companies had selected an ROA assumption below 7.0%. Revisions have occurred across the board, although…
Experts
- Investment Strategy Analyst
- LDI Team Chair, Multi-Asset Strategist, and Portfolio Manager
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