A definition of "smoothing" from KPERS

From Kristin Basso, March 14, 2007
Subject: RE: FW: Smoothing

Kathy, looks long, but hang in there. Let me know if you have any questions after going over this ...

Each year KPERS does an actuarial valuation to figure out what our assets are and what our liabilities are. This gives us a snapshot of our financial health.

“Smoothing” is a method used to “smooth” the effect of market ups and downs when calculating the value of our assets for the valuation.

Smoothing calculates the difference between the actual investment return and the assumed invested return. KPERS assumes a return rate of 8% each year.

The difference in the actual return and the assumed return is recognized equally over a number of years. KPERS uses a 5-year period. Losses and gains are phased in to lessen the impact up or down.

With five-year smoothing, for example, a 10% loss in one year shows up as a 2% loss in the following year’s actuarial valuation. The remaining 8% will show at 2% per year over the following four years. The 10% loss is spread out over 5 years instead of showing all at once.

Retirement plans use a smoothing period to reduce year-to-year ups and downs in funding levels and required contribution rates. This method is used for the valuation, but our investment return rates in the annual financial report and on the web are the actual rates.

Kristen Basso
Communications Kansas Public Employees Retirement System
(785) 296-1759
(785) 296-2422 - fax