The GASB reaffirmed generally the use of the expected long-term return on investments as a basis for valuing public pension plan liabilities, rather than move closer to a market-based discount rate, according to a proposal issued Wednesday by the Governmental Accounting Standards Board.
The continued use of the traditional valuation method would apply to plans so long as the assets available for benefits are projected to be sufficient to cover future benefits. That condition generally applies to plans that meet their actuarially determined contributions and intend to meet such future actuarial contributions, even if the plans are underfunded, said Jeremy Gold, president, Jeremy Gold Pensions, an actuarial consulting firm.
According to the GASB’s preliminary views document, plans that typically do not fund their plans with the actuarially determined contributions would use a high-quality municipal bond index rate to value only those pension liabilities that are in excess of those benefits covered by current and projected plan assets.
“It is the GASB’s view that a reasonable long-term expected rate of return on the plan’s investments would continue to be the basis for discounting projected benefit payments to their present value, but only to the extent that the current and expected future plan net assets will be sufficient to cover the future benefit payments,” according to a GASB statement.
In addition, the proposal would require public plan sponsors to use only the entry-age normal method to discount projected benefits of participants, rather than some other method.
That GASB suggestion would likely have no impact on some 65% to 70% of public plan sponsors that already use the entry-age normal method.
Overall, the implications of the proposal “will be for many (plan sponsors) a non-event,” Mr. Gold said.
The preliminary views document is a formal GASB step in its process to issuing an exposure draft of a new pension accounting standard. It is seeking public comment on the preliminary views through Sept. 17 and plans to hold public hearings on the document in October.