New Pension Reporting Standards Approved by GASB
On June 25, 2012, the Government Accounting Standards Board (GASB) revised how state and local governments report financial information on their pension plans for their employees. Two new standards were approved for reporting this information, affecting the calculation and reporting of pension costs and obligations.
Statement No. 67 addresses financial reporting for state and local government pension plans, while Statement No. 68 establishes new accounting and financial reporting requirements for governments that provide their employees with pensions. These Statements replace the requirements of Statement No. 25, Statement No. 27 and Statement No. 50.
Plans must now report the difference between plan assets and liabilities in their statements of net position. The pension asset or liability will be measured using the same valuation methods that are used by the pension plan for preparing financial statements. This is intended to make the financial status of the government more clear.
The standards also require a measurement process for pension liabilities. The steps in the process are: (1) projecting future benefit payments for current and former employees and their beneficiaries, (2) discounting those payments to their present value, and (3) allocating the present value over past, present, and future periods of employee service. In determining the discount rate, the long-term expected rate of return will still apply, unless the available pension plan assets are not expected to be invested using a strategy to achieve that return. In addition, the entry age actuarial cost method must be used to allocate the present value and this allocation must be done as a level percentage of payroll.
The new standards also accelerate the recognition of some pension expenses to align with the period in which the related benefits are earned. The effects of (a) changes in assumptions and (b) differences between assumptions and the actual experience (gains/losses) are to be expensed over the average remaining years of employment of employees, rather than the previous 30-year period. In addition, the difference between expected and actual investment earnings is to be expensed over a 5-year period, which is dramatically shorter than the current 30-year period allowed.
In reviewing changes, GASB determined that access to certain basic plan information should be available through governments’ own financial statements. As a part of that, requirements for disclosing information in the notes to the financial statements and presenting required supplementary information (RSI) are part of the new standards. The note disclosures must include descriptions of the plan and benefits provided, significant assumptions employed in the measurement of the net pension liability, descriptions of benefit changes and changes in assumptions, assumptions related to the discount rate and the impact on the total pension liability of a 1% increase and decrease in the discount rate, and net pension liability and deferred outflows and inflows of resources. The RSI schedules must have information for each of the past 10 years relating to the total pension liability, the plan trust’s net position, and the covered-employee payroll.
Statement 67 will take effect for pension plans in fiscal years beginning after June 15, 2013. Statement 68 will be effective for fiscal years of employers beginning after June 15, 2014. As usual, GASB encourages plans and governments to implement the standards earlier.
If you have any questions regarding how the new reporting standards affect your plan, please contact your Nyhart actuarial consultant.
This article was last updated on July 11, 2012