GASB`s New Pension Standard

GASB’s New Pension Standard
Recent Headlines
 Hidden Pension Fiasco may Foment Another $1
Trillion Bailout –
 Pensions That Are Seeing Red-State Pensions with
low funding Illinois, Rhode Island Oklahoma, New
Hampshire, New Jersey, WSJ
 Houston Lays Off 700 Due to Rising Pension Costs,
Associated Press
 San Francisco’s Average Public Employee Pension
Pays More Than the Average Private Sector Worker
Earns, San Francisco Chronicle
More Headlines
 Rewriting Retirement, Governing Magazine
 Small City’s Depleted Pension Rattles Rhode
Island/Bondholders Win in Rhode Island, New York
 Gilt Edge Pensions, Forbes
 Police & Fire Pensions Threaten Local Government’s
Solvency Throughout California, Mission Viejo Patch
 Battle Looms Over Huge Cost of Public Pensions,
New York Times
GASB Proposes New Approach to Pension
 Given the publicity and intense pressure to do
“something” about Public Pensions, GASB begins
their re-examination of Pension Accounting
 They are walking a tightrope of expectations from all
sides of the debate.
 Plans and their employers want a tightening of GASB
25/27, some economists demand a risk free rate of
return which would dramatically raise the PV of
liabilities lowering the funded status for every plan.
 GASB chose to utilize as its model FASB 87 for
private sector entities.
GASB’s Timeline
 January 2006 – In wake of Statement 45, adds
pensions back to research agenda
 April 2008 – Added to current agenda and began
initial work on Invitation to Comment
 March 2009 – Issued broad-based Invitation to
115 comment letters (including GFOAT)
2 public hearings with 17 presenters
GASB’s Timeline (cont.)
 June 2010 – Issued Preliminary Views document
 193 comment letters & 3 public hearings with 29 presenters
 GFOAT focused on several key points:
 Funding information (ARC) is key for management,
governance, and citizens to understand pension
 Reliability of liability – govt. doesn’t hire actuary or
control plan data
 “Liability” – TMRS reports reduction of $775 million in
liabilities due to plan changes over last 3 years
 Projected Unit Credit mirrors employee’s career
 Why ignore the pension plan accounting?
GASB’s Timeline (cont.)
 July 2011 – Issued Exposure Draft
 645 comment letters & 3 public hearings
 GFOAT focused on several key points:
 Projected Unit Credit still a better method
 Disclosures need to be modified to be effective – avoid
duplication with pension plan and make sure AAC data is
not relegated to RSI only
 Consider segregation in Statement of Net Position
 Give additional time to implement
 Plan Net Position concept leads to confusion
● June 2012 (Estimated) – Issue Final Standard
Income Statement vs. Balance Sheet
 Government financial management has always been
operations oriented:
Nature of Governmental Assets
Taxation-the underlying wealth of government
Annual Budget Cycle
 Governments were comfortable with GASB 25/27
because it took an income statement approach
Focus was determination of the ARC
ARC drove both APC and liability recognition in SNA
Income Statement vs. Balance Sheet
 In the new pension standard, the focus is on the
balance sheet:
Expense recognition (APC & ARC)
drives liability/asset (NPO)
Liability/Asset (NPL/NPA)
recognition drives expense
Accountability focus is on whether
government is adequately funding
the plan through making ARC
Accountability focus is on whether
the government has a Net Pension
Liability and how big.
Overview of the Proposals
 Disconnects state and local governmental pension
accounting measures from the funding measures
used to determine pension contributions;
 Requires employers to recognize an unfunded
pension obligation (aka, the “net pension liability”)
as a balance sheet liability in their basic financial
statements based on the market value of assets;
Overview of the Proposals
 Requires employers to record a new measure of the
pension expense in their basic financial statements
that will have little relation to the actuarially
determined contribution; and
 Replaces most of the current note disclosures and
required supplementary information with
information based on the new measures and removes
actuarial based funding disclosures. The proposal
includes over four pages of footnote requirements
and two pages of RSI requirements.
Net Pension Liability
 The total pension liability is calculated by:
 Projecting future benefits arising from automatic COLAs (and
ad hoc COLAs, to the extent they are substantively automatic ),
as well as projected service and projected salaries;
 Discounting the present value of future benefits using a single
discount rate (discussed further in the next section); and
 Allocating the cost of pension benefits over past, present, and
future periods using the traditional entry age actuarial cost
method with service costs determined as a level percent of
projected payroll on an employee-by-employee basis.
Net Pension Liability
 Single Discount Rate is comprised of two Parts:
 Expected Rate of Return for Portion Pre-funded
 High Quality AA rate for PAYGO Portion
 Requires extensive future cash flow projections
 Prohibits inclusion of contributions for future members
making the lower rate likely for most plans
 The higher the rate, the lower the PV of the
 NPL=TPL-Net Position of Plan at fair value of assets
Pension Expense
 Components of the new pension expense include:
 +Service cost ( similar to the old entry age normal cost);
 +Interest on the total pension liability as of the beginning of
the year;
 +/-Changes in the total pension liability over the year from
assumptions vs. actual (with certain deferrals for actives);
 +/-Differences between actual and projected earnings over the
year (with certain deferrals);
 -Projected investment returns over the year;
 -Employee contributions; and
 +/-Other changes in plan net position (i.e. amortization of the
 Amortization when applicable is:
 Always straight line
 Starts at the beginning of the reporting period
 Five years for difference between expected and actual rate of
return on investments
 The remaining service life of active employees (probably
between 10-15 years for most plans) for difference between
assumptions and actual
 Separate for Gains (proposed deferred inflows) and losses
(proposed deferred outflows).
Cost Sharing and Special Funding
 Cost Sharing Employers to be required to recognize a
NPL for their proportionate share of the Plan’s NPL.
 Changes in Proportionate Shares deferred and
 Non employer funders recognize a liability based on
conditional or unconditional aspect of their funding
Conditional--treated as a grant
Unconditional--non-employer records share of the NPL
 Footnotes include:
 Description of Benefits
 Assumptions
 Plan Net Position
 Changes in the NPL (14 elements)
 Components of Pension Expense (12 elements)
 Information on deferred Inflows and Outflows
 Allocated Insurance Contracts
Required Supplementary Information
 Ten Year Schedules on:
 Changes in the NPL (14 elements)
 TPL, PNP and NPL and % of PNP to TPL, covered payroll (CP)
and % of NPL to CP
 Actuarially Calculated Contributions (if employer does one)
and actual contributions made
 Notes to the RSI
Effective Date
 Periods ending June 2013 for employers with PNP
over $1 billion
 Periods ending June 2014 for all others.
Implications to Government
 Government Finance Officer’s should consider the
Audit and Reporting Implications
Funding Implications
Communicating and reconciling differences between funding
and reporting numbers to:
Elected Officials and those charged with governance
 Rating Agencies, Investors and media
 Employees and employee associations
Audit and Reporting Implications
 Government Pension Plans are often separately
governed, managed, and independent in both form
and substance from the employers that sponsor
 These plans have their own management and outside
actuaries that will generate the NPL that employers
would be required to report as a liability.
 This NPL could easily be the largest liability of the
government; and extremely material in many
Audit and Reporting Implications
 Until recently, actuarial data was completely RSI--
but now is included as a footnote and soon to be part
of the employer’s financial statements raising the
following issues:
Can the employer be confident that a very large number
prepared by an outside entity is fairly stated in all material
Will the multi-employer agency pension plan’s auditor be
willing to accept any responsibility for the actuarial data if
GASB only requires RSI disclosure of actuarial data?
Audit and Reporting Implications
 Will the employer’s auditor feel the need to perform
additional procedures under SAS 73 vs. what they’ve
done in the past but how is that done if the
procedures need to be performed on a separate and
independent entity?
Funding Implications
 Unlike the private sector that must fund in
accordance with ERISA & PBGC requirements, there
is no regulatory funding mandate for government.
 In the past the parameters set by GASB 25 & 27 were
the de facto standard for funding.
 GASB has made it clear that determination of
adequate funding is not their responsibility and has
structured the pension expense number so that it will
be almost impossible to use for funding purposes.
Funding Implications
 Without a nationally recognized standard, it will be
impossible to use shorthand (i.e in compliance with
GASB 25) to describe the funding approach.
Employers and their plans will have to explain both the
requirements for GASB reporting and the policies for funding.
Both financial statement preparers and users will have to
better understand and more carefully analyze the adequacy of
funding approaches on a government by government basis.
Government reporting in accordance with GAAP would no
longer be required to report an actuarially calculated
contribution requirement and compare it to what they actually
Funding Implications
 If a government and its plan choose to utilize an
actuarially calculated contribution (ACC) they will
need to decide whether to include separate sets of
ACC trend information in addition to the GAAP
compliant trend information.
Explaining the Numbers
 To reduce confusion, employers should keep the ACC
as close to the GAAP number as possible:
Use the same actuarial method (entry age)
Use the same basic assumptions
Use the same base year census data
 Certain areas will likely be different, however:
 Actuary update of latest valuation to the employer’s financial
statement date.
 Actuarial gains and losses related to retirees and inactives will
probably be amortized for funding purposes to reduce funding
Explaining the Numbers
 Recognition of investment gains and losses will
probably be different--and longer than the GAAP
requirement--again to reduce volatility.
 Plan changes (especially enhancements) will likely be
amortized rather than recognized immediately.
 If an employer chooses to include detailed trend
information on a funding basis in its CAFR, the
preparer will need to label that informationand
choose a CAFR location to clearly communicate that
this is not the GAAP required disclosures.
 GASB’s new standards will provide for a completely
different perspective and display of pension
 To achieve maximum benefit, employers will need to
work closely with their pension plans to ensure a
smooth transition in reporting approaches while
maintaining a clear funding strategy and discipline
to ensure improving funding status and predictable
funding requirements over time.
Final Thoughts
 The proposed standards undoubtedly do a better job
of reporting the employer’s unfunded pension
liability as of a point in time.
 But it does not address the obvious follow up
questions of If this is where we are at:
1) What should we do about it? and
2) Are we doing it?
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