Actuary Group Discusses GASB Pension Accounting Changes

June 18, 2010 ( – A new American Academy of Actuaries report indicates that a new government accounting proposal to recognize unfunded pension obligations is substantially different than current standards.

A news release from the group quoting comments on the “preliminary views” of the Governmental Accounting Standards Board (GASB)’s pension accounting approach said current accounting mandates call for the balance sheet to only recognize a liability for any actuarially recommended contributions not made (seeGASB Proposal: Pension Underfunding Reported as Liability). Academy Senior Pension Fellow Frank Todisco said the liability recognition called for under current standards “could be much smaller than the plan’s unfunded obligation.”

Todisco said the new GASB approach is conceptually similar to current requirements governing the private sector although GASB would measure the value of the obligation differently. Todisco added: “…additional clarification is required on how the GASB intends to approach the valuation of plan assets.”

The GASB document calls for the use of a single actuarial cost method for measuring the value of the obligation, eliminating the variety of choices that are currently available.  “The recommended method is already used by the vast majority of public sector plans, though here again the method differs from that prescribed for the private sector,” the actuary said.

On issues relating to the discount rate, Todisco asserted, the GASB’s “blended” discount rate approach “appears to lean heavily towards its current methodology of using the expected return on plan assets, although additional clarification may be required.“ Todisco said the GASB’s approach remains “significantly different” from that taken by the accounting standard setters for the private sector (the Financial Accounting Standards Board and the International Accounting Standards Board). Those two groups prescribe a high quality bond-based discount rate.  

Commented Todisco: “The appropriate discount rate (and, by extension, whether public and private sector plans should have different accounting) has been a key point of contention in the controversy surrounding public plan valuation.”

In general, the GASB document promotes the notion of accelerating the expense recognition of the effects of plan amendments and certain actuarial gains and losses using an average expected future service for current workers, and immediate expensing for changes in the value of obligations to retired workers. These recommended amortization periods would be more in line with approaches used for the private sector. According to Todisco, current standards allow amortization periods of up to 30 years.

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