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Observations on Input and Output Smoothing: How do they affect the funding of defined benefit plans?

A comparison of how two categories of smoothing methods affect key principles of U.S. funding regulations

The SOA is pleased to make available a report from its Data-driven In-house Research function (formerly the Rapid Retirement Research Initiative) that offers a few observations about the general similarities and differences between input and output categories of smoothing methodologies. The report is set in the context of U.S. statutory requirements for private sector single-employer defined benefit plans. It uses several hypothetical scenarios, including hypothetical variations to input and output smoothing methods found in the applicable law, to illustrate how the two categories of smoothing methods compare with respect to three key principles of funding regulation—namely, the solvency of plans, the predictability of statutory requirements, and the transparency of financial information about the plans.

This report is not intended to advocate a position for or against the use of smoothing methodologies, or for or against the use of any particular smoothing methodology. Rather, the purpose of this research is simply to provide objective, actuarial illustrations of the differences between alternative methodologies. While we hope that this report will help inform policy makers on some implications of the illustrated methodologies, we recognize there are many other issues they must also consider, which are not illustrated in this report. Consequently, the Society of Actuaries does not take any position on the merits of using the methodologies illustrated in this report.


Report

Observations on Input and Output Smoothing Methods: How do they affect the funding of defined benefit plans?


Thank You

Special thanks to the Pension Benefit Guaranty Corporation for supplying the modeling software used in this report.

We extend additional thanks to the Modeling Oversight Group and other experts, who provided helpful input during the review of the research, including:

  • Daniel Atkinson
  • Chris Bone
  • Mike Boot
  • Don Fuerst
  • Ian Genno
  • Alan Glickstein
  • Dani Goraichy
  • Emily Kessler
  • Jerry Mingione
  • Andy Peterson
  • Tom Terry


Questions

For more information, contact Joe Silvestri, Retirement Research Actuary, at jsilvestri@soa.org.