What Do The New Pension Accounting Rules Mean To Governmental DB Plans

What Do The New
Pension Accounting Rules
Mean To Governmental
DB Plans

William G. Karbon, COPA, MSPA, CPC
Vice President, Director of Compliance
CBIZ Benefits & Insurance Services, Inc.
Lawrenceville, NJ

What We Will Cover
• GASB Statements 67 and 68
– Brief background
– Why change the rules?
– Significant changes
– Requirements of GASB Statement 67
– Requirements of GASB Statement 68
– Examples

2

Abbreviations
• EAN = Entry Age Normal
• FMV = Fair Market Value
• NPL = Net Pension Liability
• NFP = Net Fiduciary Position
• TPL = Total Pension Liability

3

Background
• Current pension accounting and financial
reporting standards
– GASB 25, Financial Reporting for Defined Benefit
Pension Plans and Note Disclosures for DC Plans
• Issued November 1994
• Effective for periods beginning after June 15, 1996
– GASB 27, Accounting for Pensions by State and
Local Governmental Employers
• Issued November 1994
5

Background
• Current pension accounting and financial
reporting standards
– GASB 50, Pension Disclosures
• Issued May 2007

6

Background
• January 2006 - Board approved project to
gather information regarding effectiveness of
Statements 25 and 27

• April 2008 – Postemployment benefit
accounting and financial reporting project
added to GASB’s technical agenda

7

Background
• October 2009 through June 2010 – Board
reached tentative conclusions on basic
employer accounting and financial reporting
issues presented for public comment in the
Invitation to Comment

• Preliminary Views on Pension Accounting and
Financial Reporting Issued June 26, 2010

8

Background
• Exposure Draft Issued July 8, 2011
– Proposed rules after receipt of comments on
Preliminary Views

• GASB Statements 67 and 68 Issued June 25,
2012
– Amends GASB Statements 25, 27 and 50

9

Background
• Effective Dates
– GASB Statement No. 67 – Financial Reporting for
Pension Plans
• Effective for fiscal years beginning after June 15, 2013

– GASB Statement No. 68 – Accounting and
Financial Reporting for Pensions
• Effective for fiscal years beginning after June 15, 2014

– Earlier application of new rules is encouraged
10

Why The Change?
• Standardize pension accounting
• Clearer representation of pension obligations
• Net pension liabilities become balance sheet
item
• Provides users of financial reports with clearer
picture of the size and nature of the defined
benefit plan’s financial obligations

12

Significant Changes

13

Significant Changes

• TPL is calculated using uniform funding
method – EAN

• NPL recognized on balance sheet

14

Significant Changes
• Separates accounting from funding
– Increased volatility

• Assets recognized at FMV

15

Significant Changes
• Discount rate function of:
– Expected return
– Municipal bond index
– Sufficiency of projected assets

• Accelerated amortization of:
– Plan changes
– Gains / losses
– Assumption changes
16

Significant Changes
• Uniform methodology to determine
income/expense and balance sheet liability
– Does not require change to funding method or
contribution strategy
– Volatility in accounting does not cause change to
• However, determination of discount rate may impact

17

Requirements of GASB
Statement 67

18

Requirements of GASB Statement 67
• Establishes standards for state and local
governmental pension plans administered
through trusts in which:
– Contributions and earnings on those contributions
are irrevocable
– Plan assets are dedicated to providing pensions to
plan members in accordance with benefit terms
– Plan assets are protected from creditors

19

• Statement 67/68 requirements depend on
type of pension plan administered, as follows:
– Single-employer pension plans
• Pensions provided to employees of only one employer
– Agent multiple-employer pension plans
• Plan assets are pooled for investment purposes,
separate accounts maintained for each individual
employer
– Employer’s share of assets can only be used to pay benefits of
its employees

20

• Statement requirements depend on the type
of pension plan administered, as follows:
– Agent multiple-employer pension plans
• Plan assets are pooled for all purposes
– Assets are used to pay benefits of the employees of any
employer

21

• A defined benefit plan should present the
following financial statement:

– Statement of NFP

– Statement of changes in NFP

22

• Net Position Restricted for Pensions

– Assets + Deferred Outflows of Resources –
Liabilities - Deferred Inflows of Resources

23

• Assets reported at FMV should be subdivided
– Major categories
• i.e. cash, receivables, investments and assets used for
plan operations
– Principal components of receivables
• i.e. Employer contributions, employee contributions
and interest / dividends
– Investment Categories
• Asset classes

24

• Liabilities
– Benefits including refunds of participant
contributions
• Recognized when benefits are currently due and
payable
– Accrued investment and administrative expenses

25

• Allocated insurance contracts are excluded
from assets if:
– Responsibility for benefits are irrevocably
transferred to insurer
– All required payments to acquire the contracts
have been made
– Remote likelihood that employer or plan will have
to make additional payments to cover benefits
• Same rule for Statement 68
26

• Statement of Changes in NFP
– Additions include:
• Contributions from employers
• Contribution from nonemployer contributing entities
• Participant contributions
• Net investment income, must separately identify:
– investment income
– investment related expenses

27

• Statement of Changes in NFP
– Deductions, at a minimum must include:
• Benefit payments (including refund of participant
contributions)
• Total administrative expense

28

• Notes to Financial Statements
– Plan Description
• Name of plan, who administers plan, identify whether
plan is single-employer, agent or cost-sharing
• # of participating ers & # of non-er contributing entities
• Information regarding plan’s board / trustees
• Number of participants in each class (i.e. retirees, term
vested, actives), state if plan is closed to new entrants
• Authority establishing and description of benefit terms
• Description of contribution requirements for er, non-er
contributing entities and participants
29

– Plan Investments
• Investment policies, including:
– Procedures for establishing & amending investment policy decisions
– Policies pertaining to asset allocation
– Description of significant investment policy changes during the
reporting period
• Description of how FMV is determined
• Identification of investments in any organization that
represents 5% or more of plan’s NFP
• Annual money-weighted rate of return

30

– Receivables
• Terms of any long-term contracts for contributions to the
plan between employer or nonemployer contributing entity
and the plan
• Balances outstanding on any such long-term contracts at the
end of the plan’s reporting period

31

– Allocated insurance contracts excluded from pension
plan assets
• Amount reports in benefit payments attributable to
purchase of allocated insurance contracts
• Description of pensions for which allocated insurance
contracts were purchased in current period
• Fact that obligation for payment of benefits has been
transferred to insurance company

32

– Reserves
• If policy authorizes setting aside assets for specific purposes
such as benefit increases or contribution reductions
– Description of policy related to such reserves
– Authority under which policy was established and may be amended
– Purpose for / condition under which reserves are required or
permitted to be used
– Balances of the reserves

33

• Financial Statement Disclosures
– Components of the liability
• TPL
• Plan’s NFP
• NPL
• Plan’s NFP as a % of TPL
– If cost-sharing plan, the above should be
presented for the plan as a whole

34

– Significant assumptions (i.e. salary scale, inflation,
ad hoc COLAs) used to measure the TPL
• Source of mortality assumption
• State if assumptions are based on an experience study
and the date of such a study

35

– Discount rate
• Discount rate used to determine TPL for current year,
change is rate since prior fiscal year
• Assumptions regarding projected cash flows into and
out of the plan
• Long-term expected rate of return and description of
how it was determined
• If discount rate incorporates a municipal bond rate, the
rate used and source of the rate

36

– Discount rate
• Periods of projected benefit payments to which the
long-term rate of return and municipal bond rate will
be applied to determine discount rate
• Assumed asset allocation and long-term expected real
rate of return for each major asset class
• NPL calculated using discount rate which is 1% higher
and 1% lower than the discount rate used for disclosure
purposes

37

• Supplementary Information
– 10-year schedule of changes in NPL
• Beginning & ending balances of TPL, plan’s NFP & NPL
• Effect on changes to above for each component (i.e.
service cost, interest on TPL, change in benefit terms,
experience gains/losses, assumption changes,
contributions, net investment income, benefit
payments and administrative expenses)
• Cost-sharing plans are presented for plan as a whole

38

– 2nd 10-year schedule
• TPL
• Plan’s NFP
• NPL
• Plan’s NFP as % of TPL
• Covered payroll
• NPL as % of covered payroll
• Cost-sharing plans are presented for plan as a whole

39

– 3rd 10-year schedule
• Actuarially determined contributions of
employer/nonemployer contributing entity
• For cost-sharing plans – contractually required
contribution of employer/nonemployer contributing
entity
• Contributions recognized during fiscal year in relation
to actuarially determined contribution

40

– 3rd 10-year schedule
• Difference between actuarially recognized contribution
and the amount of contributions recognized by the plan
in relation to the actuarially determined contribution
• Covered-employee payroll
• Amount of contributions recognized by the plan in
relation to the actuarially determined contribution as a
% of covered-employee payroll

41

– 4th 10-year schedule
• The annual money-weighted rate of return for each
fiscal year

42

• Frequency of valuation
– As of most recent fiscal year end; OR
– Roll forward to most recent fiscal year-end from
an actuarial valuation no more than 24 months
prior to most recent fiscal year-end

43

Requirements of GASB
Statement 68

44

• Establishes accounting/financial standards for
state and local governmental pension plans
administered through trusts in which:
– Contributions and earnings on those contributions
are irrevocable
– Plan assets are dedicated to providing pensions to
plan members in accordance with benefit terms
– Plan assets are protected from creditors

45

• Applies to financial statements of all state and
local governmental employers who pension
plans are administered through trusts as
noted in previous slide.
• If not administered through trust as described
in previous slide, GASB Statements 27 and 50
continue to apply

46

• Single and Agent Employers
– Balance sheet liability recognized for the NPL
which is the TPL net of the plan’s NFP.
• NPLs associated with different plans can be displayed in
the aggregate, aggregated liabilities and assets should
be displayed separately
• NPL should be measured as of date no earlier than end
of prior fiscal year applied consistently from year to
year

47

– TPL should be determined as of:
• Measurement date; OR
• Roll forward to measurement date from an actuarial
valuation no more than 30 months and 1 day prior to
most recent fiscal year-end

48

– Projected benefit payments should include:
• Benefit provided to current active and inactive
employees in accordance with benefit terms and legal
agreements to provide benefits that are in force as of
the measurement date
• Effects of automatic and ad hoc postemployment
benefit changes including COLAs
• Projected salary increases
• Projected service credits

49

– Discount rate
• For period of time the plan’s NFP is sufficient to make
projected benefit payments, use long-term expected
rate of return.
• If plan’s NFP is not sufficient, use a yield or index rate
for 20-year, tax-exempt general obligation municipal
bonds with an average rating of AA/Aa or higher

50

– Discount rate
• Long-term expected rate of return
– Based on nature and mix of current and expected plan
investments over a period representative of expected length
of time between an employee’s date of hire and the time all of
their benefits have been paid

51

– Projection of plan’s NFP
• Incorporate all cash flow for employer and
nonemployer contributing entities intended to finance
benefits for current active and inactive employees and
participant contributions from current employees
• Cannot include contributions for future employees
unless contributions are projected to exceeded service
cost of the future employees

52

– Projection of plan’s NFP
• Professional judgment should be applied to project
cash flows
– Contribution amounts established by statute or contract
– Formal, written funding policy
– Average of contributions over most recent five-year period

53

– EAN used to attribute actuarial present value of
projected benefit payments
• Attribution made on individual employee basis
• Employee’s service costs should be level as % of that
employee’s project pay (use inflation rate if no
projected pay)
• Attribution begins with first period in which employee’s
service accrues pensions under benefit terms

54

– EAN used to attribute actuarial present value of
• Service cost of all pensions should be attributed
through all assumed exit ages, through retirement
• Service cost determined on same benefit terms
reflected in employee’s actuarial present value of

55

– Changes in NPL recognized in pension expense
• Present value of attributed benefit accruals
• Interest on NPL
• Present value of benefit change resulting from plan
amendment

56

• Amortization of liability experience gains/losses and
impact of assumption change
– Amortized over expected remaining service lives (actives and
inactives)
– Remaining service life for inactive is zero
– Liability experience gains/losses and changes due to
assumption changes not recognized in pension expense
should be reported as deferred inflow/outflow

57

• Five year amortization of asset experience gains/losses
– Liability experience gains/losses and changes due to
assumption changes not recognized in pension expense
should be reported as deferred inflow/outflow

58

– Notes to financial statements
• Pension liabilities
• Pension assets
• Deferred outflows of resources
• Deferred inflows of resources
• Pension expense/expenditures

59

– Plan Description
• Name of plan, who administers plan, identify whether
plan is single-employer or agent
• Description of benefit terms
• Number of participants in each class (i.e. retirees, term
vested, actives)
• Description of contribution requirements for er, non-er
contributing entities and participants
• State whether plan issues a stand-alone financial report
or if included in report of PERS or another government
60

– NPL – Assumptions and other inputs
• Assumptions/inputs used to measure TPL
– Inflation
– Salary changes
– Ad hoc postemployment benefit changes
– Source of mortality assumptions
– Dates of experience studies impacting significant assumptions

61

– NPL – Discount rate
• Discount rate used to measure TPL
– Change in discount rate since last measurement date
• Assumptions about cash flows in and out of plan
• Long-term expected rate of return
– How was it determined
– Significant methods and assumptions
• If rate uses municipal bond rate, municipal bond rate
used and source of the rate

62

– NPL – Discount rate
• Periods of projected benefit payments to which long-
term rate/municipal bond rate are applied
• Assumed asset allocation of portfolio
– Long-term expected real rate of return for each major class
– Whether expected rates are arithmetic or geometric means
• Measures of NPL using discount rate which is 1.0%
higher and 1.0% lower than rate used for financial
statement purposes

63

– Changes in NPL
• Beginning balances of TPL, NFP and NPL
• Effects of following during the period:
– Service cost
– Interest on NPL
– Change of benefit terms
– Difference between expected and actual liability experience
– Change of assumptions
– Contributions - employer, noncontributing entity & employee
– Net investment income
– Benefit payments
– Administrative expenses
– Other
64
• Beginning balances of TPL, NFP and NPL

– Additional disclosures regarding NPL
• Measurement date of NPL including date of actuarial
valuation used to determine TPL
• If employer has special funding situation, employer’s % of
collective NPL
• Brief description of change to assumptions or benefits
• Description/amount – purchased allocated insurance
contracts
• If significant, description of changes between NPL
measurement date and employer’s reporting date
65

– Additional disclosures regarding NPL
• Pension expense recognized in reporting period
• Balances of deferred outflows and inflows, classified as:
– Difference between expected and actual experience in TPL
– Changes of assumptions
– Difference between expected and actual earnings on investments
• Employer contributions subsequent to NPL measurement
date

66

– 10-year schedule of changes in NPL
• Beginning and ending balances of TPL, plan’s fiduciary
net position and NPL
• Effect on changes to above for each component (i.e.
service cost, interest on TPL, change in benefit terms,
experience gains/losses, assumption changes,
contributions, net investment income, benefit
payments and administrative expenses)

67

– Supplementary Information
• 2nd 10-year schedule
– TPL
– Plan’s NFP
– Collective NPL
– Nonemployer contributing entity’s share of collective NPL
– Employer’s share of collective NPL
– Covered payroll
– Employer’s share of collective NPL as % of payroll
– Plan’s NFP as % of TPL

68

• 3rd 10-year schedule
– Actuarially determined contributions of employer
– Contributions recognized during fiscal year in relation to
actuarially determined contribution
– Difference between actuarially recognized contribution and
amount of contributions recognized by plan in relation to
actuarially determined contribution
– Covered-employee payroll
– Amount of contributions recognized by plan in relation to
actuarially determined contribution as % of payroll

69

• 4th 10-year schedule (contribution not actuarially
determined, contributions established by statute/contract)
– Statutorily or contractually required employer contribution
– Contributions recognized during fiscal year in relation to
statutorily or contractually required contribution
– Difference between statutorily or contractually required
contribution and amount of contributions recognized by plan in
relation to statutorily or contractually required contribution
– Covered-employee payroll
– Amount of contributions recognized by plan in relation to
statutorily or contractually required contribution as % of payroll
70

• Cost Sharing Employers
– Liability should be recognized for employer’s
proportionate share of collective NPL
• Measured as of a date no earlier than end of
employer’s prior fiscal year end

71

– Suggested employer proportionate share of
collective NPL = (1) ÷ (2) × (3) as follows:
(1) = Employer’s projected long-term contribution
effort to the plan (including nonemployer
contribution entities)
(2) = Long-term contribution effort to the plan of all
employers (including nonemployer contribution
entities)
(3) = Collective NPL
72

– Proportionate share of collective NPL determined
at measurement date. Use valuation date if
contribution is actuarially determined

73

– Pension expense, deferred outflows and deferred
inflows should be employer’s proportionate share
of collective pension expense, collective deferred
outflows and collective deferred inflows.
– Proportionate share should be determined using
employer’s proportion of collective NPL

74

– Changes in the employer’s proportion of the
collective NPL since prior measurement date
should be amortized in the employer’s pension
expense.
• Amortization period is the expected remaining service
lives of all employees (active and inactive)

75

– The following are determined using the same
methodologies as single and agent employers:
• Collective NPL
• Timing and frequency of valuations
• Selection of assumptions
• Projection of benefit payments
• Discount rate

76

– Similar disclosures as single and agent employers
• Plan Description
• Assumptions
• NFP
• 10 year schedules

77

Example 1
• Fact Pattern 1:
– Assets @ 12/31/14 = $1,000,000
– 2015 Payroll = $1,000,000
– Employer Contribution Rate = 5.0% of Payroll (Per Funding
Policy)
– 2015 Benefit Payments = $100,000
– Municipal bond index rate = 4.5%
– All benefits promised by plan will be paid in next 35 years

79

Example 1
• Fact Pattern 1:

– Fund will deplete in 19 years

– Discount rate will be blended rate of 7.75% for 19 years
and 4.5% for 16 years

– Blended rate = 6.25%

80

Example 1
• Fact Pattern 2:

– Assets @ 12/31/14 = $1,000,000
– 2015 Payroll = $1,000,000
– Employer Contribution Rate = 10.0% of Payroll (Per
Funding Policy)
– 2015 Benefit Payments = $100,000
– Municipal bond index rate = 4.5%
– All benefits promised by plan will be paid in next 35 years

81

Example 1
• Fact Pattern 2:

– Fund will NOT deplete over next 35 years

– Can use the long-term expected rate of return of 7.75%

– Since funds will not deplete, no need to blend long-term
rate of return with municipal bond rate

82

Example2
• Disclosure of discount rate
Asset Class Target Allocation Long-Term
Expected Real Rate
of Return
Domestic Equity 46% 5.4%
International Equity 21% 5.5%
Fixed Income 26% 1.3%
Real Estate 6% 4.5%
Cash 1% 0.0%
Total 100%

83

Example 2

– Actuarial Assumptions
• Inflation 3.5%
• Salary Increases 4.5%, including inflation
• Investment rate of return 7.75%, net of expenses, including
inflation

84

Example 2

– Long-term ROR determined using building block method
– Best estimate ranges of future arithmetic rates of return
(net of expenses and inflation) developed for each asset
class
– Long-term ROR developed by weighting the expected
future real rates of return by target asset allocation %

85

Example 2

Domestic equity .46 X 5.4 2.5%
International equity .21 X 5.5 1.2%
Fixed income .26 X 1.3 0.3%
Real estate .06 X 4.5 0.3%
Cash .01 X 0.0 0.0%
Weighted return less inflation 4.3%
Inflation 3.5%
Total return 7.8%

86

Example 3
Actives Inactives Total

Expected Pension $2,000,000 $1,000,000 $3,000,000
Liability
Liability Loss $75,000 $25,000 $100,000

Assumption Change $100,000 $25,000 $125,000

Benefit Change $50,000 $25,000 $75,000

Pension Liability $2,225,000 $1,075,000 $3,300,000

Example 3
Actives Inactives Total

Number of 100 50 150
Participants
Avg Remaining 10 0 6.7
Service Life
Amount Subject to $175,000 $50,000 $225,000
Amortization
Immediately $50,000 $25,000 $75,000
Recognized

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