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Aon Hewitt Legislative Reporting

Risk. Reinsurance. Human Resources.

Global Report: Global Survey of Retirement Plan Accounting Assumptions This report presents the results of Aon Hewitt’s global survey of accounting assumptions used for employee benefit plans at 2015 year-end. The results of this survey may be useful to companies when setting preliminary assumptions for 2016 year-end and budgets for 2017. In addition, companies should consider the following:

At 2015 year-end, we noted that discount rates in most countries increased slightly from 2014 year-end. However, the yields on corporate bonds in countries with large pension liabilities (i.e., Canada, the Eurozone, Switzerland, the United Kingdom, and the United States) have since declined (even before the recent “Brexit” vote in the United Kingdom, which has caused an additional market shock). Any planning for 2016 year-end or budgeting for 2017 should take these and subsequent movements into consideration.

The changes in bond yields mentioned above may be due, in part, to changes in inflationary expectations. When plan sponsors consider a change in their discount rate, they should review other assumptions linked to inflation.

We are seeing companies, especially those with closed or frozen plans, establish a “glide path” as part of their investment and risk policy, with a view to automatically adjusting the risk level in the plans as market conditions vary. The glide path typically sets a specific asset allocation the investment manager must follow based on predefined triggers such as the funded status of the pension plan. If such a policy is applied, plan sponsors using U.S. GAAP should consider how the asset allocation in the relevant plans may vary when setting an assumption for the expected rate of return on assets. It may also be advisable for companies to re-assess their expected rate of return assumptions in light of the Brexit vote.

We are seeing a sparsity of AA-rated long-dated corporate bonds in many bond universes, and this makes the underlying yield curve methodology increasingly important in the determination of the discount rate. Companies may therefore wish to better understand how the yield curves they have selected are constructed.

Most countries in which defined benefit plans are prevalent have mortality assumptions that recognize anticipated future mortality improvements. Below are comments concerning mortality assumptions in several countries:

– Switzerland—The new LPP/BVG 2015 actuarial tables including mortality and disability rates were published in December 2015. Most clients did not adopt the BVG 2015 tables at 2015 year-end, but we anticipate that most companies will adopt them at 2016 year-end. The financial impact of the new tables is specific to each plan, but we

July 2016

Global Survey Retirement Plan Accounting Assumptions—YE2015 | Aon Hewitt | July 2016 2

are generally seeing a slight increase to obligations resulting from increased post-retirement life expectancy, offset to some degree by lower disability obligations for those plans which provide such benefits through the pension plan.

– United Kingdom—The most recent Continuous Mortality Investigation has resulted in 2015 mortality projections that show another slight decrease in projected life expectancy, primarily because of an ineffective flu vaccine during the prior year. There was a variety of responses by companies to this update and the current projection methodology is being reassessed for the 2016 investigation.

– United States—In October 2015, new mortality improvement assumptions were issued in the United States, showing a slight decrease in projected life expectancy as compared to the previous study issued in October 2014. Many companies adopted these new mortality improvement assumptions at 2015 year-end. Further updates to the mortality improvement assumptions are expected to be issued annually going forward.

A 2015 study found that the Australian corporate bond market is deep enough for plan sponsors to use to determine a plan’s discount rate. This led some plan sponsors to move from a discount rate based on government bond yields to a discount rate based on corporate bond yields, with a resulting increase in the average discount rate used from 2014 year-end to 2015 year-end.

Companies have been using additional ways to reduce the financial risks related to their pension plans, such as lump-sum windows, buy-ins, and longevity swaps. Lump-sum windows are typically temporary and offer members an opportunity to take a lump-sum payment in lieu of an annuity. Buy-ins occur when the pension plan purchases an annuity contract as an investment but retains the ultimate obligation to pay benefits. Under IFRS, buy-ins are generally treated as investment decisions and not as settlements, with the fair value of the annuity contract set equal to the related Defined Benefit Obligation. While the treatment is less clear under U.S. GAAP, we have, in general, not seen buy-ins trigger settlement accounting under U.S. GAAP either; however, the measurement of the annuity contract will generally differ from the IAS 19 approach, with the Projected Benefit Obligation set equal to the fair value of the annuity contract. Longevity swaps are contracts between the pension plan and an insurance company under which the insurance company agrees to take on the risk related to retirees living longer than is currently expected.

Since late 2015, many companies have announced a change to a spot rate approach for determining service cost and interest cost under U.S. GAAP. Under the spot rate approach, each of the rates along a yield curve is used to determine the present value of future cash flows and interest on those amounts, rather than using a single equivalent discount rate for this purpose. Based on an Aon Hewitt survey, about one-third of companies reporting under U.S. GAAP had adopted the spot rate approach as of 2015 year-end.

While some companies have adopted the spot rate approach under IFRS, the method is not currently as prevalent as under U.S. GAAP. An additional complication of the spot rate approach under IFRS is that the interest cost is calculated on the net pension liability—i.e., the discount rate is applied to plan assets as well as the Defined Benefit Obligation. It is unclear how interest on plan assets should be determined using the spot rate approach. While some companies have used the same equivalent rate used to determine interest on the Defined Benefit Obligation for this purpose, the auditing firms have not issued any formal guidance on this point. In addition, auditors may be more accepting of the spot rate approach in some countries than in others. Companies considering the adoption of the spot rate approach under IFRS should consult with their auditors.

In June 2015, the IASB published an Exposure Draft covering the following changes to IAS 19:

– Clarification of the application of IFRIC 14’s limit on a pension asset in specific situations;

– Clarification of the treatment the IFRIC 14 asset ceiling in the event of an amendment, curtailment, or settlement; and

– Revising IAS 19 so that the expense for periods after an amendment, curtailment, or settlement is recognized to reflect those events similar to U.S. GAAP.

If you would like an update on current economic indices or the current status of changes in accounting standards, please contact your local Aon Hewitt consultant.


Background Aon Hewitt conducted this survey of fiscal 2015 year-end accounting assumptions by gathering assumptions used by our clients. Previous surveys also included results for companies that may have used other actuarial firms.

As in previous surveys, we have focused on four economic assumptions that companies select under ASC 715, FRS 102 (U.K. local standard which is similar in nature to IFRS), IAS 19, and other accounting standards with similar requirements for assumption setting. The assumptions are:

Discount rate;

Expected long-term rate of return on plan assets (U.S. GAAP only);

Salary increase; and

Pension increase (for certain countries only).

Similar to last year, we are only showing assumptions for companies with fiscal years ending on December 31, 2015. The tables on the following pages show the average assumption as of the end of 2014 and 2015.

The Appendix provides the following additional information about 2015 year-end assumptions:

Average discount rate by duration of the pension liabilities for countries with larger pension obligations (Canada, Eurozone, Japan, Switzerland, and the United Kingdom);

Range of assumptions used at 2015 year-end for specific countries; and

Prevalent mortality table along with life expectancies for countries with larger pension liabilities.


Discount Rate at Year-End 2015 The following table shows the survey results for the discount rate assumption for the 2014 and 2015 fiscal year-ends.

Country Year-End

2014 Average Year-End

2015 Average

Country Year-End


2015 Average Australia 3.05% 4.02% India 8.19% 7.89% Brazil 12.46 13.97 Japan 0.78 0.86 Canada 4.03 4.05 Mexico 6.51 6.61 Eurozone Philippines 4.82 4.40 Austria 2.20 2.07 Poland 2.92 2.99 Belgium 1.81 1.88 South Africa 8.63 9.78 Finland 1.92 1.99 South Korea 3.18 2.78 France 1.84 2.07 Sweden 2.24 2.69 Germany 2.09 2.39 Switzerland 1.21 0.78 Greece 2.01 2.21 Taiwan 2.29 1.71 Ireland 2.15 2.55 Thailand 3.48 3.04 Italy 1.93 2.07 United Kingdom 3.55 3.77 Netherlands 2.09 2.34 United States 4.05 4.39 Spain 2.12 2.27

The values above represent an average discount rate for all post-employment plans (pension, retiree medical, and termination indemnities), as well as in-service benefits such as long-service leave or jubilee awards.

A comparison of a company’s discount rate to the rates shown above should take into consideration: 1) the maturity of the company’s plan(s) may differ from the maturities of the plans included in this survey and 2) some clients use yield curves which may support a higher discount rate while others may only refer to yields of indices.

See the Appendix for additional details about discount rates for selected countries.


Long-Term Rate of Return for 2016 The following table shows the survey results for the average expected long-term rate of return on plan assets used to determine expense for the 2015 and 2016 fiscal years for companies reporting using U.S. GAAP.

Country 2015

Average 2016

Average

Country 2015

Average 2016

Average Australia 6.18% 6.05% South Korea 3.78% 3.31% Canada 4.63 4.55 Switzerland 2.81 2.54 Eurozone Taiwan 2.05 2.04 Belgium 3.99 3.98 United Kingdom 5.53 5.89 Germany 3.55 3.54 United States 6.73 6.59 Ireland 3.82 3.80 Netherlands 2.28 2.49

The concept of an expected rate of return on plan assets no longer exists under IAS 19—it is set equal to the discount rate. For that reason, in this survey, we only included the expected rate of return for companies reporting under U.S. GAAP. As a consequence, the number of countries for which we had credible data declined, and the results for those countries with insufficient data (i.e., those with less than five data points) were removed from this part of the survey.

For the United Kingdom, our survey results previously produced an average expected rate of return by asset class for equities and for corporate bonds. We are now showing a total weighted expected rate of return assumption consistent with other countries.

The expected rates of return shown above reflect the asset allocations of the plans included in this survey. A comparison of your company’s expected rate of return to the rates shown above should take into consideration that the asset allocation for your company’s plan(s) may differ from the asset allocations of the plans included in this survey.

See the Appendix for additional details about the expected long-term rate of return assumption for selected countries.


Salary Increase at Year-End 2015 The following table shows the survey results for the salary increase assumption for 2014 and 2015 fiscal year-ends.

Country Year-End


2015 Average

Country Year-End


2015 Average Australia 3.37% 3.21% India 9.58% 9.01% Canada 3.17 3.12 Japan 2.13 2.15 Eurozone Mexico 5.38 5.29 Austria 2.73 2.67 Philippines 5.58 5.46 Belgium 3.04 2.93 Poland 3.09 2.72 Finland 3.03 2.57 South Korea 4.55 4.66 France 2.52 2.47 Sweden 2.63 2.69 Germany 2.63 2.58 Switzerland 1.64 1.52 Greece 2.09 2.06 Taiwan 3.19 3.28 Ireland 2.40 2.48 Thailand 5.39 4.94 Italy 2.82 2.78 United Kingdom 3.12 3.08 Netherlands 2.35 2.24 United States 3.81 3.71 Spain 2.59 2.33

The salary increase assumptions shown above reflect the situation of each company included in this survey. Your company’s situation may differ from that of the companies included in the survey; hence, a different salary increase assumption may be appropriate.

See the Appendix for additional details about the salary increase assumption for selected countries.


Pension Increase for Year-End 2015 The following table shows the survey results for the pension increase assumption for 2014 and 2015 fiscal year-ends. Note that the results are shown for those plans where a portion of the benefits paid to pensioners is adjusted annually and is correlated with current inflationary expectations.

Country Year-End


2015 Average

Eurozone Germany 1.77% 1.74% Ireland 1.71 1.68 Netherlands 0.88 0.91 Sweden 1.59 1.51 Switzerland 0.08 0.04 United Kingdom 3.07/2.03 3.14/2.08

For the United Kingdom, our 2015 year-end survey results produced an average assumption of 3.14% for the Retail Price Index (RPI) and 2.08% for the Consumer Price Index (CPI).

For Switzerland, we have moved to showing the average pension indexation assumptions for all plans which call for pension indexation, including those with an assumption of 0%.

See the Appendix for additional details about the pension increase assumption for selected countries.


Appendix The Appendix provides the following additional information about 2015 year-end assumptions:

For countries with larger pension obligations (Canada, Eurozone, Japan, Switzerland, and the United Kingdom), the average discount rate by duration. Note: we were only able to include plans for which the duration of the plan was available;

For specific countries, the range of assumptions used at 2015 year-end; and

For certain countries, the prevalent mortality table used at 2015 year-end along with life expectancies.


The following charts show the average discount rate selected for plans with durations falling within the ranges shown. We also show the number of plans falling within each range. Please note that duration was not provided for all plans included in the survey; therefore, the number of plans included in the charts below may differ from the number of plans used in other parts of this survey.

Canada

Eurozone


Switzerland

Japan


United Kingdom


The following charts show range of assumptions employers selected for 2015 year-end for specific countries.

Statistic Discount Rate Expected Return Salary ScalePension

Indexation

Count 111 101 84 13Average 4.05% 4.55% 3.12% 1.87%90th %ile 4.60% 6.25% 3.50% 2.50%75th %ile 4.00% 5.50% 3.50% 2.00%Median 3.95% 4.00% 3.00% 2.00%25th %ile 3.75% 3.90% 3.00% 1.75%10th %ile 3.70% 3.75% 2.50% 1.07%

Legend

- Average75th-90th %ile25th-75th %ile10th-25th %ile

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DiscountRate

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Canada


Statistic Discount Rate Salary ScalePension

Indexation Inflation


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Germany


Statistic Discount Rate Expected Return Salary Scale

Count 29 6 26Average 0.86% 2.74% 2.15%90th %ile 1.16% 4.20% 3.00%75th %ile 0.90% 3.80% 2.50%Median 0.80% 2.60% 2.23%25th %ile 0.70% 1.89% 1.50%10th %ile 0.60% 1.43% 1.25%

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Japan




Count 79 67 75 32 65Average 2.34% 2.49% 2.24% 0.91% 1.91%90th %ile 2.55% 2.62% 3.00% 1.98% 2.00%75th %ile 2.50% 2.50% 2.69% 1.50% 2.00%Median 2.40% 2.40% 2.00% 0.73% 2.00%25th %ile 2.27% 2.30% 2.00% 0.39% 1.80%10th %ile 2.00% 2.20% 1.75% 0.21% 1.75%

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Netherlands





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Switzerland


Statistic Discount Rate Expected Return Salary Scale RPI Inflation RPI-CPI Spread


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RPI Inflation RPI-CPISpread

United Kingdom


Statistic Discount Rate Expected Returns Salary Scale

Count 247 209 132Average 4.39% 6.59% 3.71%90th %ile 4.70% 7.75% 4.79%75th %ile 4.58% 7.25% 4.20%Median 4.45% 6.75% 3.56%25th %ile 4.25% 6.10% 3.00%10th %ile 4.05% 5.50% 3.00%

Legend- Average75th-90th %ile25th-75th %ile10th-25th %ile

0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%

Discount Rate Expected Returns Salary Scale

U.S.


Below is a table showing the prevalent mortality table used for 2015 year-end for select countries, along with the life expectancies for a male and female retiree age 65. Please note that we show the life expectancy for a retiree age 65 in 2016 as well as for a retiree age 65 in 2056. The difference between the two values shows the increase in longevity that is expected over the next 40 years by the mortality improvement assumption. For example, an age 65 Canadian male’s longevity is expected to increase by 2.1 years over the next 40 years.

Base Table Life Expectancy (Mortality Improvement if Male In: Female In: Country Separate From Base Table) 2016 2056 2016 2056 Canada CPM Private (Improvement Scale B) 21.6 23.7 24.0 25.9 Germany Heubeck Richttafeln RT 2005 G 19.2 24.3 23.2 28.0 Netherlands Prognosetafel 2014 20.1 24.8 23.1 27.2 Switzerland BVG 2010 21.6 24.7 24.1 27.1 United Kingdom S2PMA/S2PFA (CMI 2014 1.5%) 22.8 27.3 24.9 29.4 United States RP-2006* (MP2015) 21.3 24.6 23.3 26.6

* RP-2006 refers to the RP-2014 base rates projected backward to the year 2006 with Scale MP-2014

For More Information If you would like further information on accounting assumptions for defined benefit plans, contact your local Aon Hewitt actuarial consultant or U-Xinn Cheang in Chicago, Illinois (+1.847.442.4248), Kirsten Miller in Glasgow, Scotland (+44.7834.609704), or Yc Tao in New York, New York (+1.212.441.2556).

For more information on the countries in this newsletter, please refer to the Aon Hewitt Country Profiles eGuide. You can learn more about the Country Profiles eGuide here.

If you are a subscriber to the Aon Hewitt Country Profiles eGuide platform and wish to access the full text of any Country Profile including all Updates, please click here and enter your eGuide User Name and Password.

About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 35,000 professionals in 90 countries serving more than 20,000 clients worldwide across 100+ solutions. For more information on Aon Hewitt, please visit www.aonhewitt.com.

Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE: AON).

© 2016 Aon plc This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Hewitt’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Hewitt reserves all rights to the content of this document.

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