new pension rules

New Pension Proposed Rules: Are You Ready?

Presented by David BullockAugust 25, 2011

© 2011 Macias Gini & O’Connell LLP. All rights reserved. This Macias Gini & O’Connell LLP session provides information and comments on current accounting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other conclusions with respect to the matters addressed in this issue. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at accounting that complies with matters addressed in this publication. For additional information on topics covered in this publication, contact a Macias Gini & O’Connell LLP client service partner.

2

David is a Partner with Macias Gini & O’Connell LLP (MGO) with18 years of experience providing audit services to state and local governments and nonprofit entities. Since joining MGO, David has been responsible for providing technical assistance and training programs to clients, MGO staff and other professionals in the areas of governmental accounting, auditing and reporting.

Speaker David G. Bullock, Partner, MGO

He has been a frequent speaker for the Association of Government Accountants (AGA), State Association of County Auditors and for the California Association of Public Retirement Systems, and is currently serving as President of the Silicon Valley Chapter of the AGA.

Agenda GASB Due Process Pension and Pension Plan Exposure Drafts

• Highlights• Note Disclosures and RSI• Effective Date and Transition

Questions

3

GASB Exposure Drafts

4

Lack physical substance

Nonfinancial in nature

Initial useful life extending

beyond a single reporting

period

• Issued 6/27/111. Accounting and Financial Reporting for Pensions, an

amendment of GASB Statement No. 27 (Pension Exposure Draft)

2. Financial Reporting for Pension Plans, an amendment of GASB Statement No. 25 (Pension Plan Exposure Draft)

• Comments accepted until 9/30• Public Hearings – 10/3, 10/13 & 10/20• User Discussion Forums – 10/4, 10/14 & 10/21

Pension Exposure Draft

• Separates accounting from funding • Eliminates the Annual Required Contribution

approach• Introduces the Net Pension Liability

5

Pension Exposure DraftThe net pension liability (NPL)• Unfunded pension obligation a government

(employer) is responsible to pay• Equals Total Pension Liability less Plan Net Position

(primarily investments reported at fair value)• Replaces current cumulative difference between

annual pension cost and contributions made (the Net Pension Obligation or NPO)

• Would be reported on the face of a government’s financial statements and would substantially increase the liabilities reported for most governments

6

Pension Exposure Draft

Measuring the Total Pension Liability involves:1. Projecting future benefit payments2. Discounting projected future benefits to present

value3. Allocating present value of projected future benefits

to past and future periods

7

Pension Exposure DraftProjecting Future Benefit Payments

• Continue current practice of incorporating expectations of future employment related events into projections

• Include valuation of ad hoc COLAs that occur regularly and are substantively automatic (New)

8

Pension Exposure DraftDiscounting Future Benefit Payments to

Present Value• Current standard’s discount rate = Expected future rate of

return on pension plan’s investments over the long-term

• Proposed standard largely keeps status quo except when assets are not expected to meet future plan benefits

• Difference would be discounted by a high-quality tax-exempt municipal bond index rate (30-year AA/Aa or higher rated bonds)

• Proposed standard will likely result in a lower blended discount rate for plans that are significantly underfunded, thus, increasing the total pension liability

9

Pension Exposure DraftAllocating Present Value of Projected Benefits

• Current standard allows for 6 actuarial cost methods to select from and allows attribution of payments to be done either in level dollar amounts or as a level percentage of payroll

• Proposed standard only allows for the Entry Age Normal (EAN) Method

• EAN is based on an individual calculation for each active plan member

• Allocated at a level percentage of payroll

10

Pension Exposure DraftAnnual Cost of Pensions

Net pension liability changes annually due to:• Employees work and earn more benefits• Outstanding liability accrues interest• Contributions to the plan increase/decrease • Actual economic and demographic assumptions are

different from actuarial assumptions• Changes made to economic and demographic

assumptions • Changes to plan provisions• Value of plan investments changes

11


Immediate current year expenses include:• Benefits that are earned each year by employees • Interest on the total pension liability • Changes in terms of the pension benefits to be provided • Projected earnings on plan investments • Changes in value of plan assets other than investments

(contributions and benefit payments)• The effect of differences between what was assumed

regarding economic and demographic factors, as it relates to retirees

• The effect of using new economic and demographic assumptions, as it relates to retirees

12


Deferral of expenses include:

• The effect of differences between economic and demographic assumptions and actual experience, as it relates to current employees

• The effect of using new economic and demographic assumptions, as it relates to current employees

• The effect of difference between actual investment earnings and what was projected

Deferrals are amortized over estimated remaining service lives or 5 years as noted on next slide

13


Period over which changes are recognized:

14

Change Active Members Inactive MembersInvestment gain or loss 5 years 5 yearsActuarial gain or loss Avg. expected remaining service lives ImmediateActuarial assumption or method Avg. expected remaining service lives ImmediatePlan benefits Immediate Immediate

Amortization Periods for Pension Expense

Results in faster recognition of changes

Pension Exposure DraftCost-Sharing Multiple-Employer Pension Plans

Types of employer pension plans: Single-employer pension plans involve only 1 government Agent multiple-employer pension plans

• Separate accounts are maintained for each government in the plan

• Akin to a collection of single employer pension plans Cost-sharing multiple-employer pension plans

• Governments share costs and risks• Any assets in plan may be used to pay any employee’s

benefits, regardless of what participating government they worked for

15

Pension Exposure DraftCost-Sharing Multiple-Employer Pension Plans

Current requirements:• Reflect the sharing of risks and assets• Do not require actuarial information to be presented for

individual employers• Information found in the cost-sharing pension plan’s own

financial statements

Proposed requirements:• Report the government’s proportionate share of net pension

liability• Report the government’s proportionate share of annual

pension expense

16

Pension Exposure DraftNote Disclosures

Requirements for all governments:• Descriptions of their pension plans • Descriptions of persons covered by them• Policies for determining government’s annual contributions

to the plan• Significant assumptions used to measure net pension

liability• Additional information related to discount rate• Net pension liability, deferred outflows and inflows and

pension expense

17

Pension Exposure DraftNote Disclosures

Requirements for single and agent plans:• Change in the total pension liability, plan assets, and net

pension liability during current period• Components of current period pension expense• Reconciliation of beginning and ending balances of deferred

outflows and inflows during current period

18

Pension Exposure DraftRequired Supplementary Information (RSI)

10-year RSI schedules containing information about -• Change in the total pension liability, plan net position, and

net pension liability• Pension liability ratios• Ratios of actuarially calculated contributions (if applicable)• Notes to the schedules

19

Pension Exposure DraftSpecial Funding Situations

Entity other than the employer government (usually another government) is legally responsible for contributing to the plan.

• Conditional

• Unconditional

20


Conditional Special Funding• Conditional on a particular event or circumstance that is

unrelated to the pension plan• Recipient government recognizes the contribution from

the nonemployer as revenue• Nonemployer reports the contribution as an expense

21


Unconditional Special Funding• The nonemployer legally responsible for contributing has

essentially taken a portion of the pension obligation of the employer as its own

• The nonemployer would recognize its proportionate share of the employer’s net pension liability, deferred outflows and inflows and pension expense

• The employer would recognize revenue equal to its portion of the noneomployer’s pension expense

22

Pension Exposure DraftDefined Contribution Pensions

Defined contribution plan characteristics: Stipulates only the amounts to be contributed to an

employee’s account each year

Does not specify the amount of benefits employees will receive after the end of their employment

Essentially no change to existing requirements

23

Pension Exposure DraftEffective Date and Transition

Effective for fiscal years beginning after June 15, 2013 for most employers

One year earlier for certain single employer plans with plan net position of one billion dollars or more

Employers would be required to restate prior financial statements under the new rules if practical, or to reflect the cumulative affects of the new rules in financial statements

24

Pension Plan Exposure Draft Highlights

Amends Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans

Amends Statement No. 50, Pension Disclosures Establish standards for financial reporting by defined

benefit pension plans (defined benefit and defined contributions) administered through qualified trusts

25

Pension Plan Exposure Draft New Disclosures and RSI

Time-weighted and money-weighted rates of return on plan investments

Employers’ net pension liability information (for single-employer and cost-sharing pension plans)

10-years of RSI Information

26

Pension Plan Exposure Draft Rates of Return on Plan Investments

Time-weighted rate of return• Expresses investment performance, net of investment expenses,

without consideration of timing and amounts invested • Considers performance of a hypothetical dollar invested from the

beginning of an investment period to the period’s end• Does not consider effect of varying amounts invested due to

contribution receipts, reinvestment of investment returns, or benefit payments

27

Pension Plan Exposure Draft Rates of Return on Plan Investments

Money-weighted rate of return • Expresses investment performance, net of investment expenses,

after consideration of the impact of the changing amounts actually invested

• Takes into account effects of transactions that increase and decrease amount of plan investments (e.g., contributions and benefit payments)

• Provides information that is comparable with long-term expected rate of return of plan investments

28

Pension Plan Exposure Draft Information about the

Net Pension Liability of the Employer

Replaces “funded status of employers” disclosure Only for single-employer and cost-sharing pension plans Disclosure includes:

• Components of the net pension liability of the employer(s) as of the end of the plan’s reporting period

• Ratio of plan net position to total pension liability of employer(s) as of that date

• Significant assumptions used to measure total pension liability

29

Pension Plan Exposure Draft Required Supplementary Information

10 years of information For single-employer and cost-sharing pension plans

• Schedule of Changes in the Net Pension Liabilities of the Employer(s)• Schedule of the Employer(s) Net Pension Liability• Schedule of Employer Actuarially Calculated Contributions

For all pension plans • Schedule of Investment Returns

Notes to schedules

30

Pension Plan Exposure Draft Implementation Date and Transition

Effective for fiscal years beginning after June 15, 2012 for defined benefit pension plans that meet ALL of the following criteria:

• Single-employer pension plan• Plan net position of $1 billion or more in fiscal year ending after

June 15, 2010• Participating employer does not have a special funding situation

All other pension plans, this statement is effective for financial statements for periods beginning after June 15, 2013

Employers would be required to restate prior financial statements under the new rules if practical, or to reflect the cumulative effects of the new rules in the financial statements

31

Now For Questions.

32

[email protected]

Thank you for listening.

33

new pension rules

Business