Pensions Will Report Lower Funded Ratios under New GASB Rules

November 29, 2011 (PLANSPONSOR.com) – Government employ­ers and pension plan administrators should be prepared for funded ratios reported in their financial statements to decline sharply under new Governmental Accounting Standards Board (GASB) rules, according to a new Issue Brief released by the Center for Retirement Research (CRR) at Boston College.

The report noted that GASB proposes two major changes for reporting purposes: 

  • Assets would be valued at market rather than smoothed; and 
  • Liabilities would be discounted by a blended rate using: 
    • the long-run return for liabilities covered by projected assets; and 
    • the high-grade municipal bond rate for liabilities covered by other resources. 
     

The researchers found the aggregate funded ratio using market assets was only 67% in 2010 compared to 77% using actuarial assets. Estimates of the blended discount rate that will result from GASB’s new proce­dure show the funded ratio will decline in 2010 – the latest year for which data are available – from  77% to 53%.  

The GASB outlined its new proposals in two exposure drafts released in July (see GASB Makes Pension Reporting Proposals). 

According to the CRR report, the main implementation problem with GASB’s proposed blended rate is it requires a compli­cated calculation based on a number of assumptions. The determination of the portion of benefits funded requires a projection of plan assets available each year to cover promised benefits. The asset projec­tion would include assumptions not only about plan returns, but also about future contributions from the government and from employees. These contribu­tions may or may not come to pass.   

In addition, the researchers noted in order to produce useful analysis, the data need to provide meaningful measures of government obliga­tions and be consistent across states and localities and over time. They contend that the new GASB discounting proposal fails on a number of counts.  

GASB’s proposals will affect the reported Annual Required Contribution (ARC) for pension plans – the payment required to cover normal cost and amor­tize the unfunded liability over 30 years – in two ways. First, the move from actuarial to market value of assets and the new liability measure increase the unfunded liability and thereby the required amortiza­tion payment. Second, a blended discount rate will raise the normal cost. Therefore, reported ARCs are likely to increase substantially.   

However, the report said the feed­back GASB has received suggests that employers will continue to use the traditional actuarial smooth­ing techniques to calculate their ARCs for funding purposes.  

The Issue Brief can be viewed from http://crr.bc.edu/briefs/how_would_gasb_proposals_affect_state_and_local_pension_reporting.html.

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