FASB Clarifies Accounting Treatment for Market-Based Cash Balance Plans

“Well-managed, daily-valued” market-based cash balance pension plans may soon be immune from the accounting risks and volatility associated with traditional defined benefit plans, October Three Consulting reported Thursday.

The consulting firm’s conclusion comes after the Financial Accounting Standards Board approved the recommendation of its Emerging Issues Task Force earlier this month that benefits for market-based cash balance plans, which are legally classified as defined benefit plans, be valued by setting the discount rate equal to the assumed interest crediting rate. Plan sponsors would be able to apply the new accounting guidance retroactively as well as prospectively, beginning with their next pension measurement date.

The standards board’s members instructed its staff to draft a proposed Accounting Standards Update for the board to consider in a vote on a written ballot. The board also decided to hold a 60-day comment period for the proposed update.

If ultimately finalized, participant benefits in market-based cash-balance plans would be communicated to participants as an account balance, which includes pay credits and interest credit based on an investable market return in any of the following forms:

• The return on the plans’ assets;
• The return on the plans’ assets that approximates the associated cash balance liabilities; and
• The return on a regulated investment company.

Participants may also elect lump sum payments.

Idan Shlesinger, a retirement solutions practice leader at October Three, said current pension accounting standards require earned pension benefits to be projected into the future based on plan rules, then discounted to the present day based on AA corporate bond yields. Shlesinger said the issue with this for plan sponsors is that it can cause a fluctuation in, and artificial inflation of, the liability for the benefits.

“The problem is that the growth [of market-based cash balance plans] is generally faster than corporate bond yields,” says Shlesinger. “So, you’re increasing the value at one rate and bringing it back today at a lower rate.”

Shlesinger explains that the proposed new accounting calculation would make it simpler and more sensible for plan sponsors to estimate their market-based cash balance pension obligations. October Three touted market-based cash balance plans in December as an “almost risk-free solution for employers” that provides employees with higher balances than traditional fixed-rate cash balance plans.

However, the current DB accounting rule takes the predictability and stability of market-based cash balance plans and makes it “volatile,” says Shlesinger. “We had to go through this big circuitous path to get back to what was common sense.”

Shlesinger believes the current accounting rules have slowed the adoption of market-based cash balance plans, particularly for medium and large corporations. However, almost 60% of all DB plans in the U.S. are now cash balance plans, about 60% of which use a market-based crediting rate—up from 10% that used a market-based rate 2018.

“What we’re trying to do is cut through some of the technical aspects and say, for an employer, why this is so much better than the older style pension plans,” says Shlesinger. “The accounting rules, I would classify as noise.”

October Three wrote in its recent blog post: “Given the strong support for the change expressed by the task force and the board, we expect these changes to be quickly adopted and to eliminate once and for all the barrier that accounting uncertainty has posed to the broader adoption of market-based cash balance plans.”