Pension and OPEB Update - Government Finance Officers Association

Pension and OPEB Update - Government Finance Officers Association

Pension and OPEB


A Presentation for the GFOA

Annual Conference by

Paul Zorn, Pat Robertson and

Luke Huelskamp

Chicago - June 11, 2012

Copyright © 2012 GRS – All rights reserved.

Pension and OPEB Update Overview

Pension Update


►Single and Agent Employers

►Cost-Sharing Employers

►Plan/Trust Accounting and Reporting

►Timing and Effective Dates

OPEB Update


►Progress to Date

►Next Steps



In July 2011, the GASB issued its Exposure Drafts

(EDs) on pension accounting and financial


One ED amended GASB Statement No. 27,

Accounting and Financial Reporting for Pensions –

applicable to governments that sponsor pensions

The other ED amended GASB Statement No. 25,

Financial Reporting for Pension Plans – applicable to

pension trusts

The GASB’s decisions are considered tentative

until they are made final



The EDs were issued after a lengthy deliberative

process which included:

►An Invitation to Comment in 2009

►Preliminary Views in 2010

►Related hearings and testimony

The GASB has continued to deliberate the EDs in

light of submitted comments and is expected to

release the final Statements in June 2012

The GASB’s authority extends to accounting and

financial reporting but not to actuarial valuations

for funding purposes


The GASB’s Current Standards

Statement No. 27 provides two sets of standards for

employers that sponsor public pension plans:

►Employers in single and agent multiple-employer


►Employers in cost-sharing multiple-employer plans

Statement No. 25 provides one set for public

pension plans

►Single-employer, agent multiple-employer, and costsharing

multiple-employer plans

Statement No. 50 provides several technical

amendments to Statements No. 25 and No. 27


The GASB’s Current Standards

Single-employer plans provide benefits to the

employees of only one employer

Agent multiple-employer plans pool assets

for investment purposes but assets are legally

segregated to pay the pensions of each


Cost-sharing multiple-employer plans pool

and share their assets and obligations to

provide pensions across all participating



The GASB’s Current Standards

For employers that sponsor single-employer and

agent multiple-employer plans:

Pension Expense = Annual Pension Cost (APC)

• Based on the actuarially determined “Annual Required

Contribution” (ARC) adjusted to reflect interest on actual

contributions that are greater or less than the ARC

Pension Liability = Net Pension Obligation

• The accumulated difference between the annual pension

cost and actual employer contributions made since the

effective date of Statement No. 27 (i.e., periods beginning

after June 15, 1997)


The GASB’s Current Standards

For employers in cost-sharing multipleemployer


Pension Expense = Contractually Required


• An employer’s contractual contributions to the costsharing


• But not necessarily reflecting the actuarially determined


Pension Liability

• The difference between an employer’s contractually

required contributions and actual employer



The GASB’s Current Standards

Key Parameters

►Six allowable actuarial cost methods

►Discount rate is the long-term expected

investment return

►Actuarial gains/losses and other changes in

unfunded actuarial accrued liability

amortized over a maximum of 30 years


Tentative Decisions Related to

Single and Agent Employers


Key Tentative Decisions

The employer incurs a pension obligation as a result of

the “employment exchange” – i.e., the exchange of

employee services for compensation

The pension plan is primarily responsible for paying

pension benefits to the extent the plan has sufficient


The employer is primarily responsible for paying

benefits to the extent the plan does not have sufficient


The unfunded pension obligation meets the definition

of a liability under GASB Concepts Statement No. 4

and is measureable with sufficient reliability to be

recognized in the basic financial statements


Net Pension Liability

The GASB decided the employer’s basic

financial statement liability for pension

benefits should be the unfunded pension


The Net Pension Liability (NPL) equals:

►The employer’s Total Pension Liability (TPL)


►The employer’s Plan Net Position (PNP)

measured using fair (market) value of plan assets



Total Pension Liability

Total Pension Liability is:

►The actuarial present value of projected benefit

payments attributed to past service, including

future benefits related to service, salary, automatic

COLAs, and ad hoc COLAs (to the extent they are

substantively automatic)

►Determined 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


Discount Rate

The TPL’s actuarial present value is determined

using a single discount rate that reflects:

►The long-term expected investment return to the

extent current assets and projected contributions and

investment earnings are sufficient to pay projected


►Otherwise, a high-quality, tax-exempt municipal

bond index rate

►The EDs based the bond rate on an index of 30-year

tax-exempt municipal bonds rated AA/Aa or higher.

This was tentatively revised to the rate on an index of

20-year tax-exempt general obligation bonds with an

average rating of AA/Aa or higher.


Discount Rate – Projecting Benefits

and Plan Net Position

To determine the discount rate:

►Benefit payouts for current employees and retirees

are projected

►Plan net position is projected (including employer

and employee contributions and investment earnings)

►To the extent plan assets will be sufficient to pay

benefits, the benefits are discounted using the longterm

expected rate of return

►To the extent plan assets will not be sufficient to pay

benefits, the benefits are discounted using the

municipal bond rate

►The single discount rate is the rate that, when applied

to all projected benefits, equals the sum of the present

values using the long-term rate and the bond rate


Determining the Discount Rate


Illustrative Projected Benefits and Projected Plan Net Position


Projected Benefits

Projected Plan Net Position




This portion of projected

benefits is discounted using

the long-term expected rate

of return

This portion of projected

benefits is discounted

using a tax-exempt

municipal bond index rate



1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35



Discount Rate - Projecting Benefits

and Plan Net Position

Subsequent to the EDs, the GASB provided additional

tentative guidance for projecting benefits:

► Where contributions are subject to statutory or contractual

requirements or a formal written policy related to

employer contributions exists:

• Professional judgment should be used to project future

contributions, considering the most recent 5-year contribution

history and other known conditions.

► Otherwise, projected contributions should be limited to an

average of contributions over the most recent 5-year

period, potentially modified based on subsequent events.

► Average could be expressed as percent of pay or percent of

actuarially determined amounts.


Pension Expense

Components of Pension Expense - Immediately Recognized

► Service cost

► Interest on total pension liability

► Projected investment earnings (subtracted)

► Actual administrative costs

► Member contributions (subtracted)

► Change in TPL due to changes in plan terms (benefits)

Treated as Deferred Outflows of Resources or Deferred

Inflows of Resources (DO/I)

► Change in PNP due to differences between projected and actual

earnings on plan investments

► Change in TPL due to differences between expected and actual


► Change in TPL due to changes in plan assumptions


Pension Expense – Deferred Recognition

of Changes in Total Pension Liability

In the EDs, the GASB decided certain changes in the TPL

should be treated as DO/I and included in the pension

expense over the average expected remaining service lives of

active members over the closed period:

► Changes in assumptions related to active members

► Differences between expected and actuarial experience related to

active members

► But not changes in the TPL due to inactive (including retired)

members – these would be recognized immediately

Subsequently, the GASB tentatively decided that all

differences between expected and actual experience and

changes in assumptions should be treated as DO/I and

included in pension expense over the unweighted average

expected remaining service lives of all employees (active,

inactive, and retired).


Pension Expense – Recognizing

Changes in Investment Earnings

The annual difference between actual and

expected investment earnings would be treated

as DO/I and recognized in the pension expense

over a 5-year, closed period


Tentative Decisions Related to

Cost-Sharing Employers


Cost-Sharing Plans & Employers

Cost-sharing plans would calculate the TPL, PNP,

NPL, PE and DO/I using the same methods as

single and agent plans

Employers in cost-sharing plans would recognize

their “proportionate share” of the plan’s NPL, PE

and deferred outflows/inflows of resources

An employer’s proportionate share would be

based on the employer’s long-term contributions

relative to the collective long-term contributions of

all employers in the plan


Cost-Sharing Plans & Employers

Subsequently, the Board tentatively decided that the

cost-sharing employer’s proportionate share should be

determined as the “present value of the employer’s

projected contributions that are projected to satisfy the

collective net pension liability”

However, if this approach is not practical, the

proportionate share can be estimated using an

approach “associated with the manner in which

contributions are assessed to satisfy the NPL”

This could be based on contributions or payroll (single

period or historical average) or internal methods used

to determine contribution rates


Cost-Sharing Plans & Employers

The ED also required the following to be treated as

DO/I and recognized a cost-sharing employer’s

pension expense over the remaining service lives

of active employees

►Changes in the proportionate share from period to


►Differences between the employer’s actual

contributions and its proportionate share

The GASB subsequently decided that individualemployer

changes can be accounted for net in each

period rather than separately accounting for each

in each period


Special Funding Situations

Special funding situations occur when an entity

other than the participating employer has a legal

obligation to make contributions to the plan on

behalf of employers

The legal obligation can be either:

►Conditional – based on events and circumstances

unrelated to pensions

►Unconditional – based on a fixed percent of the

employing government’s payroll, or as a fixed

percent of the contribution requirement


Special Funding Situations

If the nonemployer’s legal responsibility is

conditional, the contribution is treated as a


►The employer

• Recognizes its full NPL, PE and related deferrals in its

financial statements

• Recognizes the contribution from the nonemployer as


►The nonemployer

• Recognizes its contribution as a non-pension expense


Special Funding Situations

If the nonemployer’s legal responsibility is

unconditional, the nonemployer is treated like a

participating employer:

► The nonemployer recognizes its proportionate share on the

NPL, PE and related deferrals in its basic financial


► The employer would reflect the nonemployer’s

involvement in financing the pension benefits

If the nonemployer assumes a “substantial” portion of

the pension liability, it would provide note disclosures

and required supplementary information as if it were

a participating employer


Special Funding Situations

Subsequently, the GASB tentatively


►If the nonemployer contributing entity is the

only entity required to make contributions to

the trust, the nonemployer should report its

involvement as an assumption of the

collective net pension obligation of all



Tentative Decisions Related to

Plan/Trust Accounting and Reporting


Trust or Equivalent Arrangement

Revised Statement No. 25 would apply to

trusts or equivalent arrangements (i.e.,

“qualified trusts”) used to administer the

plan - having the following characteristics:

►Employer (and other) contributions to the plan

are irrevocable;

►Plan assets are dedicated to providing pension to

members in accordance with benefit terms;

►Plan assets are legally protected from creditors of

the employer, nonemployer contributing entity,

and plan administrator. Plan assets also

protected from creditors of plan members.


Trust Financial Statements

The ED requires two financial statements:

►Statement of Plan Net Position (end of period)

• Assets (e.g., contributions receivable)

• Deferred Outflows of Resources

• Liabilities (e.g., benefits due and payable to members)

• Deferred Inflows of Resources

• Net Position

►Statement of Changes in Plan Net Position (over


• Additions (e.g., net investment income, contributions)

• Deductions (e.g., benefits paid, administrative expenses)

• Net Increase (Decrease) in Plan Net Position


Disclosures (All Plans)

Descriptive Information (e.g., benefits

provided to members, classes of members

covered, etc.)

Investment Information (e.g., plan

investment policies, concentrations of

investments over 5% of plan net assets, rates

of return)

Other Information (e.g., contributions,

reserves, allocated insurance contracts, etc.)


Disclosures (Single and Cost-

Sharing Trusts)

Components of the Net Pension Liability

(e.g., TPL, PNP, NPL, ratio of PNP to NPL)

Significant assumptions used to measure

the TPL (e.g., discount rate, salary increases,

mortality tables, long-term expected return,

bond index rate, effect of a +/- 1% change in

the discount rate, etc.)

Date of the TPL valuation and if the amount

reported is the result of roll-forward



RSI (Single and Cost-Sharing


10-year schedule of changes in net pension liability

10-year schedu10-year schedule of TPL, PNP, NPL,

and ratios of NPL/TPL and NPL to covered employee


10-year schedule of actuarially calculated employer

contribution (ACEC) and actual employer

contributions (but only if ACEC is determined)

► Subsequent to the EDs, the phrase was changed to

“actuarially determined employer contribution” (ADEC)

10-year schedule of actual annual time-weighted and

money-weighted rates of investment return, net of

investment expenses

► Subsequent to the EDs, the GASB changed this 10-year

schedule to require only money-weighted rates of return


RSI (Agent Plans)

10-year schedule of actual annual timeweighted

and money-weighted rates of

investment return, net of investment


►Subsequently changed to require only moneyweighted

rates of return


Measurement Timing & Frequency

Under the GASB EDs

►A full measurement of the employer’s pension

liability should be made at least every two years

►The employer’s liability measurement need not be at

fiscal year end (FYE); however, it should be done no

more than 24 months before the employer’s FYE

►If the full measurement is not done at the employer’s

FYE, it should be rolled forward to FYE and updated

to reflect all significant changes

►The value of plan assets should reflect plan net

position as of the employer’s FYE


Measurement Timing & Frequency

Subsequent to the GASB EDs

►The employer should recognize the NPL as of a

measurement date no earlier than the end of its

prior fiscal year, consistently applied

►A single or agent employer should determine the

TPL component of the NPL at the measurement

date either by:

• an actuarial valuation as of that date or

• an update procedure to roll forward amounts from an

actuarial valuation as of a date not more than 30

months plus 1 day prior to its fiscal year end

• Any significant changes in the TPL, including changes

related to discount rates, should be included



In transitioning to the new standards, the

GASB would like:

►The effects of the new standards to be

reported as adjustments to prior periods

►Restatement of the beginning balance sheet


►Restatement of deferred inflows/outflows to

the extent it is practical with available



Effective Dates

ED Effective Dates

►Reporting periods beginning after June 15, 2012

for certain large single employers with a plan net

position of $1 billion or more

►Reporting periods beginning after June 15, 2013

for all others

New Tentative Effective Dates

►Trust’s Financial Statement – reporting periods

beginning after June 15, 2013

►Employer’s Financial Statement – reporting

periods beginning after June 15, 2014


Implications of the Changes

Pension accounting and funding/contributing will

be disconnected

A version of the unfunded pension obligation

(NPL) will be included in the employer’s basic

financial statements

The discount rate may reflect tax-exempt,

municipal bond rates, making the TPL more


The NPL will also be volatile as a result of changes

in the market value of assets and the discount rate


Implications of the Changes

The Pension Expense will be significantly

different from the actuarially determined

contributions, and more volatile

Employers participating in cost-sharing plans

will need to recognize their proportionate

share of the plan’s NPL, PE and DO/I in their

basic financial statements

Nonemployers with legal obligations to

contribute will need to recognize their

proportionate share of the NPL, PE and DO/I



OPEB Update

OPEB Update - Background

OPEB Accounting and Financial Reporting

Project added to GASB agenda in April 2011

Project objectives include improving:

►Accountability and transparency of financial

reporting related to OPEB (including degree to

which interperiod equity is achieved)

►Usefulness of information for decisions by users

of financial reports

The Board’s approach has been to apply a

common framework to pensions and OPEB,

to the extent appropriate


OPEB Update – Decisions to Date

The Board has tentatively agreed:

►An employer’s obligation for OPEB meets the

definition of a liability under Concepts Statement

No. 4

►The OPEB liability is measureable with sufficient

reliability for recognition in the financial


►To consider issues related to measuring OPEB

liabilities and expenses, with the understanding

that these may be different from pensions


OPEB Update – Next Steps

July 2012 - OPEB deliberations resume

Through February 2013 – Issues related to

OPEB liability, expense, implicit rate subsidy,

alternative measurement method discussed

April 2013 – Task force meeting

August 2013 – Issue Exposure Drafts

December 2013 – Public hearings

June 2014 – Final Statements



Cost-Sharing Plan Perspective

Significant Impacts

Very few changes to financial statement

presentation for DB plans

Significant amount of additional

disclosure required

Significant impact relative to participating



Important Consequences

Cost-sharing plans will have to provide the

measurements and much of the note

disclosures for employers

Data and actuarial information logically

originates from the plan level

Audit Considerations

Plans should prepare for a substantial

increase in:

►Actuarial costs

►Audit costs

►Internal staff time


Important Consequences (continued)

Introduction of a NPL, PE and DO/I will

likely create confusion and

misunderstanding regarding the longterm

cost of the retirement plan

►Education critical

Efficient delivery mechanism


GASB Field Test Results

Increase in the overall AAL

Employer financial statements

►Proportionate share of NPL, PE and DO/I


►Volatility in NPL and PE

Multiple employer year-ends

►Tentative decisions reduce need for multiple

year-end closings



Few changes to plan financial statement


Significant additional disclosure required

Significant impact to financial statement of

participating employers


How Recent Changes Affect Your

Reporting Requirements


Net Pension Liability

NPL is determined as of the measurement

date, which anchors the actuarial valuation


The measurement date can be no earlier

than the end of the government’s prior fiscal

year, consistently applied from year to year.

►That date is typically the date of the actuarial

valuation, however the actuarial valuation can

have a date earlier than the prior fiscal year, if

there is an update procedure to roll forward

amounts from the actuarial valuation (provided

that valuation is no more than 30 months (plus 1

day)) prior to its fiscal year end.


Net Pension Liability


►A local government’s year end is June 30,

2011. Their actuarial valuation is dated

March 31, 2010. They would need to have

their actuary roll forward numbers to at least

June 30, 2010 or ideally more closer to their

current fiscal year end of June 30, 2011. In

addition the fair market value of assets would

have to be measured as of at least June 30,

2010; or ideally closer to June 30, 2011. There

needs to be consistency in the year to year

measurement date, no cherry picking of a

month when the fair market value of assets

rises higher than other months.


Impact on Actuaries

The new standards will require a great

deal more of work, particularly for the


• Actuarial numbers

• Roll forward numbers

• Note Disclosures, which while not finalized,

are likely to be quite extensive


Impact on Actuaries

Multiply this by everyone needing these

numbers, particularly for some cost sharing and

agent plans and this translates into a lot of

actuaries working overtime in reviewing the


Some agent and cost sharing plans will need to

develop specialized software to allocate out

assets particularly if they haven’t had to do this

in the past, and this will require some major

software implementation plan designs.

You should start working with your actuary or

plan administrator early on this...


Other Considerations

For those plans having multiple divisions, i.e. the

Police have a different benefit multiplier than

say the General or Fire divisions, you may

consolidate all the liabilities into an aggregate

number or you may separate the liability

numbers out for allocation purposes.

It is possible your pension plan is overfunded

and in which case you would have an asset on

your Statement of Plan Net Assets.

For Agent and Employer plans with different

fiscal year end dates consensus needs to be

worked out on which measurement date to use.


Notes Disclosures

There are many charts that will need to be added for ten

years of information. Note that there may be gaps in some

of the 10 year charts where the information is not available,

i.e. the plan may have switched actuaries say six or seven

years ago. GASB is requiring this information


The Board is likely to remove the details of expense and

changes in deferral balances for single/agent employers in

the Notes Disclosure.

In Required Supplementary Information a schedule of

actual contributions compared to statutory (contractually

required) contributions for employers will be required for

employers that have such contribution requirements but

do not have an actuarially determined contribution



Benefit Changes

Benefit changes that occur subsequent to

the measurement date will require

disclosure in the Notes section.

Benefit changes that happen prior to the

measurement date will require inclusion

in the Total Pension Liability, typically

from a supplemental valuation

performed by the actuary.



Example 1 – 94% Funded


Example 2 – 62% Funded


Thank You

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