Data & Research December 17, 2015

Is It Time to Bump Up DB Rate Assumptions?

Nearly all plan sponsors—99%—decreased their discount rates last year, to a level that is unlikely to be reversed in 2015, because of the small change in yield curves through November 30.
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The annual pension accounting research study by SEI Institutional, in its 14th year, outlines how some plan sponsors and auditors are interpreting the events in recent years and the impact of the current economic environment. Based on this analysis, and assuming no change during December 2015, plan sponsors with a December 31 measurement date should consider increasing the discount rate they are using—but not by much, if at all.

“The yield curve increased slightly in 2015, with corporate bond indices rising 35 to 40 basis points,” says Jonathan Waite, director of the advisory team and chief actuary for SEI’s Institutional Group. “Rising discount rates will result in slightly lower plan liabilities and lower pension expense for the upcoming year. Additionally, new mortality tables might further decrease liabilities by 1% to 2% at year-end.”

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The study analyzed a database of 625 corporate defined benefit plan sponsors, revealing a 75-basis point range of discount rates used for 2014 pension expense, a tighter range than last year’s analysis. The results of the study provide companies with guidance for setting the discount rate and return on asset (ROA) assumptions that pension plan sponsors will use for 2015 year-end disclosures.

In looking at year-end 2014 ROA assumptions, most plan sponsors (62%) had ROAs between 7% and 8.25%, as with year-end 2013. More than 90% had ROAs between 5.52% and 8.25%, the same range as last year. According to the paper, plan sponsors should be wary in using other plans’ asset return assumptions as a guide in setting their own. Rather, they should continue to look at long-term capital market assumptions as a guide, but customize the results for their asset allocations.

Data is derived from the 2014 SEI Plan Sponsor Accounting Database, which consists of data from Standard & Poor’s Institutional Market Services database, as well as proprietary analysis created by SEI’s Institutional Group. The full paper can be accessed at SEI’s website. 

Data & Research December 17, 2015

More High-Performing RIAs Have Succession Plans

More than half of high-performing firms (52%) have succession plans ready for implementation compared with 40% of all other firms.
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More than one in three registered investment adviser (RIA) firm owners—37%—plan to exit the business within the next ten years, up from 30% in 2014, according to research from the Fidelity RIA Benchmarking Study.

The study finds a majority of firms (59%) prefer an internal succession. However, only 27% of firms have next-generation owners in place and only 9% of equity, across all firms, is held by those next-generation owners.

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Fidelity’s research also identified a group of “high-performing firms”— those firms which outperformed others in growth, productivity and profitability—and found them more prepared when it comes to succession planning.

  • More than half of high-performing firms (52%) have succession plans ready for implementation compared with 40% of all other firms;
  • A higher percentage of these firms have changed their approach or readiness for succession over the last three years (68% vs. 52%); and
  • More of these firms have hired, identified or begun developing potential successors in the past three years (23% of high-performing firms vs. 15% of all other firms).

High-performing firms also appear to be connecting the dots between succession planning and valuation: 75% of them have a mechanism in place to determine firm value in the event of an internal succession or ownership transition versus 61% of all other firms.

“As firm leaders sit down to think about their business plan for 2016, they should also consider what their 5-year, 10-year, even 20-year, plan is for their business. What will their legacy be?” says David Canter, executive vice president, practice management and consulting, Fidelity Clearing & Custody Solutions. “They can look at the succession plans their peers are crafting for insights on what they need to do and steps they need to take now, not later.”  

The 2015 Fidelity RIA Benchmarking Study surveyed 441 registered investment adviser (RIA) firms between April 21 and June 15 in collaboration with an independent third-party research firm.

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