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How Your Investment Policy and Asset Allocation Impact Your OPEB Valuation
Bottom Line Up Front
- Your OPEB investment policy and asset allocation both play a major role in determining your discount rate or investment rate of return.
- Plans with higher equity allocations and a more robust funding policy have the potential to utilize a higher discount rate (yielding a lower disclosed liability), but it also depends on your specific OPEB plan.
- You should consult with your actuary, financial advisor, and investment advisor on the best investment policy and asset allocation plan for your long-term goals.
Short answer: your investment policy and asset allocation both play a major role in determining the discount rate your Actuary will use to perform your OPEB valuation.
What Impacts the Discount Rate?
Under GASB 75, assuming that you don’t change benefits, there are three factors you can control that will impact the discount rate:
- Your funding policy – how much you’ll contribute each year
- Your investment policy – what asset classes are being utilized
- Your Plan’s projected benefit payments
If you are operating on a pay-as-you-go basis or funding very modestly, you will be forced to value your plan using the 20-year municipal bond index rate (S&P Index was 1.59% as of May 28, 2021). If you’re invested with higher equity allocations and have a more robust funding policy, you may be able to value your plan at 7.00% or higher.
Given that plan liabilities move in the opposite direction of interest rates, this may change disclosed liabilities materially.
So, What Can I Do?
Under GASB 75, the discount rate is a number ranging from the municipal bond rate up to the cap of your plan’s expected return on assets. Where your discount rate will fall in the range is based on how funded the plan currently is and how funded it is projected to be in the future. For plans that are even modestly funded, a higher expected rate of return could lead to a higher discount rate and thus a lower liability.
While a highly aggressive investment policy will lead to lower liabilities, it’s important to remember that these funds are intended to meet long-term obligations. We encourage you to review your options with your investment advisor to determine the proper allocation for your organization and plan.
How can Odyssey help?
We can work with you and your governmental organization to develop actuarial valuations, look at funding options to help pay plan obligations, optimize your OPEB benefits strategy, develop projections on funding, and more. For a free review of your OPEB plan, please contact one of our Odyssey consultants or fill out the form below.
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