GASB’s “preliminary views” on new public pension accounting rules point toward significant increases in most employers’ reported liabilities

The Government Accounting Standards Board (GASB) has issued its Preliminary Views on major issues relating to pension accounting and financial reporting by employers, and a Plain-Language Supplement. The documents are the next step in issuing new accounting statements which would potentially replace Statements No. 25 and No. 27. The following is a summary of the major changes and their potential effect on governmental reporting.

Pension Liability on Balance Sheet

The net pension liability (the unfunded portion of the total pension liability) would be reported on the balance sheet instead of in the notes to financial statements. This would replace the current cumulative difference between the annual pension cost and contributions made (the Net Pension Obligation or NPO).

This change will substantially increase the liabilities reported on the balance sheet for most employers with underfunded plans.

New Way of Reporting Pension Expense

The annual pension expense would be determined as the following: (1) normal cost for current service, plus (2) interest cost on the total pension liability, minus (3) expected earnings on plan assets, plus or minus (4) amortizations (see changes in unfunded liability below) of experience gains and losses, changes in assumptions, and changes in plan terms, and plus or minus (5) the accumulated difference between assumed returns on plan investments and actual returns to the extent that such difference exceeds 15% of market value. The annual pension expense would replace the current annual required contribution (ARC).

Since the new calculation differs substantially from traditional actuarial funding calculations, it is likely that this will result in differences between the reported pension expense and the annual employer contributions.

Measurement of Total Pension Liability

There would be changes in the way that the total pension liability is determined. This includes the recognition of cost of living increases (COLAs), the discount rate, and the actuarial cost method used.

Measurement of COLAs

Future ad hoc COLAs would be required to be valued in the liabilities when there has been a regular pattern and expectation that these would be granted. Currently, recognition is discretionary.

This change will also increase the liabilities that are reported for some systems.

Discount Rate

Under Statement No. 27, the discount rate is selected as the estimated long-term investment yield of the plan. The Preliminary Views largely keeps the status quo for selection of the discount rate with one exception. If the current and projected plan assets (with respect to current employees) would not be expected to meet all future plan benefits, then the benefits not covered by projected plan assets would be discounted by a high quality tax-exempt bond index. While the Preliminary Views does not provide an example, it appears that the latter situation would usually occur in those instances where the employer is making contributions less than the full actuarially determined contribution for current participants.

This change would increase the liabilities that are reported for those systems where the full actuarial required contribution is not expected to be made, and possibly for other systems as well depending on how GASB defines expected future pension plan assets.

Actuarial Cost Method

All plans would be required to use the Entry Age Normal Method for purposes of liability disclosure on the balance sheet and in the determination of the pension expense. Since between 70% and 80% of all public plans currently use this method, only the remaining plans will need to change methods. For some of those remaining plans, the impact could be substantial.

Changes in Unfunded Actuarial Liability (UAL)

Changes in the unfunded actuarial accrued liability generally come from three sources:

  • Differences between actual plan experience and the actuarial assumptions as they relate to the measurement of   the pension liability,
  • Changes in actuarial assumptions and methods, and
  • Changes in plan benefits.

For purposes of determining the pension expense, the Preliminary Views indicate that changes in UAL from the above sources related to active employees should be amortized over a period equal to the expected working lifetime of the group. For most groups of employees, this period is usually between 10 and 15 years. For inactive employees including retirees, changes in UAL would need to be recognized immediately. Under current rules all changes in the UAL may be amortized over a maximum period of 30 years.

This will require faster recognition of losses related to liabilities, but also faster recognition of changes that reduce costs. Note that losses related to investment experience will not be amortized but will be recognized immediately to the extent the 15% of market value threshold is crossed.

Cost Sharing Plans

In a cost sharing plan, the experience of the total plan is shared among all participating employers. There is generally one calculation of liabilities and one calculation of annual pension expense. Currently, employers sharing cost have simplified disclosure compared to other employers. Cost sharing employers do not need to disclose an unfunded actuarial liability but only their obligation to contribute to the plan. Under Preliminary Views, the plan will allocate a portion of its net pension liability and changes in that liability (the annual pension expense) to each participating employer, which will then include this amount as a liability in its financial statements.


Because the GASB release is merely Preliminary Views (as opposed to an Exposure Draft of proposed changes), the issue of transition was not addressed.

Next Step for Employers

GASB has requested comments on the Preliminary Views by September 17, 2010, which will be followed by public hearings in October. Employers and retirement systems that wish to comment on the Preliminary Views should do so before the deadline. After the hearings, GASB is expected to begin work on exposure drafts which will ultimately replace Statements No. 25 and 27. (Also, GASB will at some point work on making parallel changes to the OPEB Statements No. 43 and 45.)

Cheiron is continuing to analyze the potential effect of the Preliminary Views. If you have any questions, or desire an estimate of the impact of these changes on reported liabilities and expenses for your plan, please contact your Cheiron consultant.