How is the expected rate of return on pension assets determined?

EROA is set by the plan actuary and investment consultant based on the long-run expected return of the asset allocation. Typical EROA for a 60/40 portfolio is 6–7%. The rate must be defensible and reviewed annually; SEC has scrutinized companies using high EROA assumptions to reduce reported pension expense.

What happens when actual return differs significantly from expected?

The difference between actual and expected return creates an actuarial gain (actual > expected) or loss (actual < expected) that accumulates in accumulated other comprehensive income (AOCI). Amortization of this difference flows into income over future periods via the corridor method or faster recognition election.

Expected Return on Plan Assets vs Actual

Calculate expected return on pension plan assets using assumed long-run return and beginning fair value of assets, and quantify the asset gain/loss from deviation of actual from expected return.

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Expected Return on Plan Assets vs Actual

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Frequently Asked Questions

How is the expected rate of return on pension assets determined?

What happens when actual return differs significantly from expected?