The GASB's newly released public pension accounting proposal tilts strongly in favor of the current use of expected long-term return on investment for valuing pension plan liabilities, rather than moving closer to a market-based discount, according to actuarial accounting consultants.
But other elements in the Governmental Accounting Standards Board's preliminary views document, issued as a precursor to an exposure draft of a new rule, could cause major changes in the way public plan sponsors recognize pension costs and funding.
Among them are requiring plan sponsors to report the full unfunded liability on the balance sheet and immediate recognition on the balance sheet of benefit improvements and asset gains or losses.
Overall, the GASB proposal “would have a significant impact on” employers' financial statements, said James J. Rizzo, senior consultant and actuary, Gabriel, Roeder, Smith & Co., Fort Lauderdale, Fla.
On the discount rate for valuing pension liabilities, Paul Angelo, San Francisco-based senior vice president and actuary, The Segal Co., said in a statement that “sponsors and systems will be pleased that GASB agrees that, to the extent that future benefits can be paid out of fund assets, then the employer's net cost should reflect the expected earnings on those assets, rather than a market discount rate unrelated to the earnings on plan assets.”
Jeremy Gold, president, Jeremy Gold Pensions, an actuarial consulting firm in New York, said, “compared to the private sector, the (GASB current rules and proposal) are weak” in terms of accounting for economic costs of pensions plans. “It will really be business as usual” for many public plans.
“The end result is taxpayers (and other financial statement users) aren't getting good information on the value of benefit promises,” Mr. Gold said.
Discounting liabilities by “the use of (long-term expected) return on plan assets is not a good method for financial reporting,” he said.
“If you have future cash flows (the pension benefits payouts) that are without risk, you should discount them at a rate that has very little risk, very little default risk,” rather than the long-term expected investment return on plan assets, Mr. Gold said.
“There will be considerable controversy surrounding these new reporting requirements, and we expect and encourage substantive public input and debate during the process leading up to the final GASB statement,” according to Mr. Angelo.
The proposal calls for public plan sponsors to use a blended rate for valuing pension liabilities. They would use the traditional valuation method — the expected long-term rate of return on plan investments — to calculate the value of liabilities so long as the assets are projected to be sufficient to cover present and future benefits. But then the plans would use a high-quality municipal bond index rate to value those pension liabilities that are in excess of those benefits covered by current and projected plan assets.
Most plans would continue to use only the traditional valuation method, and not have to use the blended rate, because they have current and projected assets to cover present and future benefits, according to some actuarial consultants.
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, Mr. Gold said.