Industry Insights

• Pension expense is based on contributions made (pay-as-you-go basis) or based on a contractually required amount, which can be determined either by statute, by contract, or on an actuarially determined basis.

The following inputs, unless noted otherwise, will be included in pension expense in the current period:

• Employees’ service cost attributed to the current period in the actuarial valuation
• Interest on total pension liability (TPL)
• For active and inactive employees, changes in TPL due to changes in benefit terms
• Effects of differences between expected and actual experience and the effects of changes of assumptions should be recognized as follows:
1. To the extent that effects relate to the TPL of inactive employees (including retired employees), the effects should be recognized immediately
2. To the extent that effects relate to the TPL of active employees, should be recognized as a deferred outflow or inflow of resources and recognized in pension expense based on the weighted average of the remaining employment of active employees with which the change is associated
• Projected earnings on plan investments
• Difference between actual investment earnings and projected earnings will be deferred and recognized as expense over a five-year period beginning in the period in which the difference occurred
• In general, all other changes should be included in expense in the period of change

• Earlier recognition of pension expense
• Increased comparability of reported pension information
• Recognition of liability and expense as benefits earned by employees

• A government sponsor only reports a liability to a pension plan if the government sponsor’s contribution to the plan is less than the contractually required amount. This method does not take into account when benefits are earned (when service is provided by employees).

• TPL is the portion of the actuarial present value of projected benefit payments that is attributed to past periods of employee services.
• The cost-sharing employer is responsible for a proportionate share of the collective TPL not covered by pension assets, which is an unfunded obligation, and the entity should report its portion of the amount as a net pension liability (NPL) on the statement of net position. NPL is calculated as TPL less plan net assets.
• Other government liabilities to a pension plan, such as contributions due but not yet paid, would be reported separately from the NPL.

• The addition of this long-term liability to the statement of net assets will reduce unrestricted net assets.
• Cost-sharing entities will have to calculate their portion of NPL and record NPL and pension expense as well as disclose plan information.

• Actuarial valuation is not required by GASB.

• The TPL needs measured as of each cost-sharing employer’s year-end, and an actuarial valuation must be completed at least biennially. TPL can be from either an actuarial valuation as of the cost-sharing employer’s year-end or from updated procedures rolling forward amounts from an actuarial valuation as of a date no more than 24 months earlier.

• Newly required by GASB, although employers might have been using this method previously.

• Although actuarial valuations are not required by GASB, if a pension plan used actuarial valuations, in practice, the long-term rate of return on assets is used for the discount rate.

• As long as plan assets are projected to be sufficient to make projected benefit payments, governments would discount projected benefit payments using the long-term expected rate of return.
• If plan assets are projected not to be available to be invested long-term and, therefore insufficient for paying benefits, then governments would need to incorporate into the discount rate a 30-year, high-quality, tax-exempt municipal bond index rate to the extent projected benefits are unfunded.

• As current tax-exempt municipal bond rates are low and projected benefit payments are discounted using a blended rate that includes this rate, the actuarial present value will be greater and the net pension liability larger.

• Although actuarial valuations are not required by GASB, in general, if a pension plan used actuarial valuations, only automatic cost-of-living adjustments (COLAs) were typically included in liability and expense calculations.

• Automatic COLAs and discretionary COLAs that are substantially automatic are included in the calculation.

• This will increase NPL.

• If an actuarial valuation was used, a choice of various actuarial methods was allowed.

• The only actuarial method allowed to allocate the discounted present value over a period will be the entry age normal cost allocation method.
• Attribution of the present value of benefit payments should be done as a level percentage of projected payroll.

• This will increase comparability of reported pension information.

• Note disclosures currently include required contribution rates of the employer in dollars and the percentage of that amount contributed for the current year and each of the two preceding years, and how the contractually required contribution rate is determined, or that the cost-sharing plan is financed on a pay-as-you-go basis.

Governments participating in pension plans would disclose the following (this list is not all inclusive):

• Description of benefits
• Name of the plan
• Description of the benefit provisions  
• Classes of employees covered
• Whether a stand-alone pension plan financial report is available and, if so, how to obtain it
• Net pension liability information
• Significant assumptions used in the measurement of the TPL
• Detailed information about the discount rate (including a sensitivity analysis that shows the effect on the NPL of a 1 percentage point increase and a 1 percentage point decrease in the discount rate)
• Proportion used to determine its recognized amounts
• Plan net position information
• Elements of the plan’s basic financial statements (or, if available, information on how to obtain the plan’s financial statements and whether same basis is used)
• Other information
• Policy for determining annual contribution
• NPL, deferred outflows and deferred inflows of resources related to pensions, and pension expense
• Date of actuarial valuation
• Description of changes of assumptions or benefit terms that affect TPL
• Individual components of NPL, deferred outflows and deferred inflows of resources
• Individual components of the current period pension expense
• On-behalf revenue recognized under a special funding situation

• Cost-sharing employers will present detailed plan information.
• This will increase comparability of reported pension information.

• Required supplementary information (RSI) currently includes a schedule of funding progress and employer contributions for the plan, unless the financial statements of the plan are publicly available.  RSI also currently includes a disclosure that the information presented relates to the cost-sharing plan as a whole and it provides information to facilitate understanding the scale of the information presented relative to the individual employer.

Governments participating in pension plans would present the following (this list is not all inclusive):

• 10-year schedule containing information about the changes in the collective NPL
• 10-year schedule, measured at the collective level, including, TPL, plan net position, NPL, ratio of plan net position to TPL, amount of covered payroll, NPL as a percent of covered payroll
• 10-year schedule presenting detailed information at the individual-employer level
• If an actuarial calculated employer contribution is determined, 10-year schedules presenting actuarial information at the collective level and at the individual-employer level
• Notes to the schedules

• Cost-sharing employers will present all schedules for the participants as a whole, and certain schedules will also be presented with information for their proportionate share.