DBSummit07: Waiting for the Other Shoe to Drop

The Financial Accounting Standards Board (FASB) unveiled new pension accounting rules in October 2006 with further rules to come in Phase II of the project at a later date.

align=”center”> Audio Recordings of the 2007 DB Summit Are Available Here


Speaking on a panel at PLANSPONSOR’s 2007 DBSummit in Washington, D.C., Stewart Lawrence, SVP, National Retirement Practice Leader at Sibson Consulting, in keeping with the theme of the session said the FASB’s first phase was a bedroom slipper, while Phase II is likely to be a ski boot. FASB Statement 158 requires defined benefit plan sponsors to record the funded position of their plans on their balance sheets rather than in the notes section of their financial statements, among other things (See FASB Publishes Final Standards for Pensions and OPEB).

According to Stewart, the second phase will have the biggest impact as the FASB will address income statements – whether items will measure Projected Benefit Obligations (PBO) or Actual Benefit Obligations (ABO), how items will be recognized on the statement (whether sponsors can use smoothing or amortization over several years), and the effect of items on Profit & Loss. The FASB is has also said it will revisit the provisions of Statement 158.

Impact of Phase II

Panel member Robert McBride, Vice President, Senior Consulting Actuary at Diversified Investment Advisors, said the FASB will also be looking at risk in investments, treatment of multi-employer plans, longevity risk, and cash balance plans during Phase II. To get an idea of what is in store, employers may be able to look at International Accounting Standards, which are usually ahead of FASB, McBride said. IAS Statement 19 moved the placement of asset value on the income statement, eliminated smoothing, and addressed amortizations.

The effect for plan sponsors, according to McBride, is a review of current benefit offering designs – defined benefit, defined contribution, and health care, comprehensively. For example, McBride said, a move to PBO could spark a move from final salary formulas in DB plans to career average salary formulas. Sponsors are also looking at plan administration and looking to bundle services. McBride said scenario testing should be performed.

told audience members that Phase II is likely far away from being implemented, and the only way sponsors can really prepare is to take measures to limit the volatility of their DB funding status. McBride stated the FASB said proposed rules are expected sometime in 2008.

In addition to new accounting standards for private employer plans, the Government Accounting Standards Board (GASB) also has issued new rules for state, local, and municipal government plans (See The Bottom Line: Ready or Not, Here It Comes). Harvey M. Katz, Partner, Brown Rudnick's Employee Benefits and Compensation Practice Group, told DBSummit audience members, GASB Statements 43 and 45 will likely result in credit impairments to government plans.

Prior to the statements which, among other things, require governments to disclose their other post-employment benefit obligations (OPEB), government health programs worked on a pay-as-you-go basis; now governments are considering prefunding benefit obligations (See AL Sets Up Trust to Fund OPEB Obligations), Katz said. He warned that hitting taxpayers for funding could actually drive individuals out of states or municipalities.