Governments are continuing to deal with two new pension standards that significantly change both the accounting and disclosures related to their employees’ participation in a defined benefit pension plan. GASB 67, Financial Reporting for Pension Plans —An Amendment of GASB Statement No. 25, was the first in the suite of pension standards to be implemented. This standard, applicable to the pension system itself, brought forth different requirements for actuarial valuations and, with it, new and expanded disclosures within the notes to the financial statements, but it did not require amounts to be recorded in the financial statements themselves—it left that to its partner in crime GASB 68, Accounting and Financial Reporting for Pensions—An Amendment of GASB Statement No. 27. GASB 68 is required to be implemented for periods beginning after June 15, 2014, one year after the required implementation of GASB 67, and establishes guidelines for measuring and, more importantly, recognizing liabilities, expense/expenditure, and deferred inflows/outflows of resources in an employer’s financial statements.
It is important for governments to understand that what they do for funding purposes (for example, to calculate the annual required contribution) may no longer parallel what is required to be done for financial reporting purposes. These new GASB standards certainly changed that! For this reason, although many pension boards and employer governments may think they are set from a funding perspective, many assumptions, methodologies, and even timing considerations need to be revisited for financial reporting purposes.
Those June 30 year-end governments that first had to adopt GASB 67—and certainly those that have already adopted GASB 68—have learned several things in going through this process, perhaps the most critical being the importance of a timely and comprehensive implementation plan. A key part of this plan involves communication—communication between the pension board, the plan’s actuary, the employer government, the plan auditor, and the auditor of the governmental employer. And the earlier this communication happens, the better!
Some governments are just now adopting GASB 67. Other governments, having already gone through the GASB 67 adoption, are now gearing up for the adoption of GASB 68. Regardless of where you are in the process, this communication will be a key component to a successful implementation.
Here are some tips to help guide the timing and content of these discussions:
Parties to involve in the discussion
Without getting all interested parties involved up front, a government could, at best, risk timing delays, and, perhaps, at worst, risk a modified opinion on its financial statements. There are many who have a vested interest in the successful implementation of these new GASB standards including the plan, the pension board, the plan’s actuary, the employer government, the plan auditor, and the auditor of the governmental employer.
In most cases, it is the pension board that conducts most of the conversation with the actuary and provides the actuary with the appropriate direction and approvals. However, it is imperative that individuals from the employer government (the city, county, township, village, etc.) ensure the pension board fully understands the impact of these new pension standards and the need for assumptions to be reviewed and agreed to not only by the pension board and its actuary, but also by the plan auditor, the employer government, and the auditor of the employer government. Without all these parties being part of the conversation, the potential for a less than smooth implementation of these new pension standards increases. In some cases, the actuarial report may even need to be redone if these parties are not all in agreement in advance of the report being completed. It is important to note that the actuary’s expertise on these matters is critical, but the actuary typically needs approval from the pension board to effectuate any changes.
Key items to discuss
Unlike with the prior GASB pension standards, which allowed for a one-year lag between the actuarial valuation and the reporting of those valuation results within the plan’s financial statements, the new financial reporting standards eliminate that lag time for the plan, and in many instances also for the employer. This alone eliminates much of the lead time the actuary had in the past to complete these valuations. To compound that, in addition to the census data, the actuary also needs solid financial data from the plan prior to being able to finalize the valuations. The auditors, then, will need the actuarial information to include in the audited financial statements. We recommend that governments start with the end in mind – when the final audited financial statements are needed – and then back into the timeline of who needs what and when. Remember when you are establishing this timeline that everyone involved will need more time especially during the earlier years of the implementation of these new standards.
GASB 67 and 68 have certain requirements that may differ from those used in the actuarial valuations for funding purposes. For this reason, a critical component of these implementations is ensuring that the actuarial methodologies and assumptions comply with the GASB standards. In addition, actuaries are required to also follow Actuarial Standards of Practice. The plan and the employer must use the same assumptions – a key reason why both of these parties must be at the table when assumptions are being determined.
Here are just a few key assumptions to consider:
GASB 67 and 68 changed how this is calculated, resulting in a need for more attention to this important assumption. There are now multiple components involved in determining the discount rate, and it will impact plans differently depending primarily upon how well funded they are. The actuary will make this calculation, but the one key assumption they need is consensus on the long-term expected rate of return on pension plan investments. This long-term expected rate of return will vary by plan, as it is dependent upon each individual plan’s investment strategies and plan asset composition. Organizations will want to ensure that the long-term rate of return is a supportable assumption, based on forward looking information typically provided by an investment advisor.
- Mortality assumptions
People are living longer. Yes, that is good news for all of us! However, this also presents us with the need to ensure that the mortality assumptions being used in the actuarial valuations are the ones that are most reflective of our current employee and retire population and reflective of the latest mortality trends. In particular, the Society of Actuaries recently came out with some new mortality tables that reflect longer-lived assumptions for most of us. While these new tables weren’t built for public sector employees, all parties will want to think through the impact these new tables have on the valuation assumptions. Should these new tables be used? Why or why not? In addition, ensure that the actuary’s assumptions also build in a component for future mortality improvement. Understanding what tables are being used and why would be important for all parties to understand. We have seen some actuarial valuations using older mortality tables, which might be fine if those tables were appropriate for the plan’s population. There needs to be a good and supportable reason for using particular tables; ensure your plan has that documentation. Mortality assumptions can significantly impact the net pension liability that employers will now need to record; therefore, it will become a much more scrutinized assumption than it has been in the past.
- Other assumptions that both plans and the employer should consider include inflation, salary changes, and any ad hoc postemployment benefit changes (including ad hoc COLAs). Ask your actuary what else they feel you should consider to make sure you are in compliance with the new pension standards. Remember that the requirements in the GASB statements may now diverge from what you do for purposes of determining the annual required contribution.
When to have these discussions
By now, hopefully it is clear who to talk to and what to talk about. We recommend getting in touch with your actuary and the other interested parties now to start collaboratively planning. Once the elements above have been discussed and a plan is agreed to—memorialize the plan in writing so that all parties are on the same page.
With these items addressed early, you will be well on your way to ensuring that the application of these new standards (whether that be in the year of implementation or on a continuing basis), doesn’t hold up your year-end close or year-end audit!
Please do not hesitate to contact your Plante Moran consultant if you have any questions.