Major new accounting principles look set to overhaul how US public plans present their finances. Helen Morrissey looks at how these changes could affect a sector struggling to deal with its liabilities
Public plans now have to get to grips with proposed accounting changes which will have a major impact on how they present their accounts and could expose them to increased volatility and scrutiny.
On July 8 the Governmental Accounting Standards Board (GASB) published two exposure documents detailing changes to how government employers and pension plans report their accounts. The key changes put forward are:
• Uncoupling pension accounting measures from the funding measures used to determine pension contributions;
• Net pension liabilities will be represented on the balance sheet rather than in the notes.
There will also be significant changes to how total pension liability and expense will be calculated. These include:
• Plans whose assets do not cover projected benefits will no longer be able to use expected rate of return as the discount rate. Instead they must use the rate of a 30-year AA rated municipal bond;
• Changes to the net pension liability resulting from plan changes will need to be recognised immediately. Currently they can be amortised over a 30 year basis;
• Cost sharing plans will need to report their portion of a collective liability instead of just annual costs and payments.
A GASB spokesperson said: “The proposed changes are designed to improve the effectiveness of pension standards by reducing complexity and increasing transparency, consistency and comparability across governments.”
However, so far the industry is split as to whether this has really been achieved. While actuaries such as Segal’s senior vice-president Paul Angelo said when it comes to calculating pension liabilities “GASB got it right,” concerns are being raised about other aspects of the proposed changes.
The marriage and divorce of accounting and funding
It is thought uncoupling accounting from funding will confuse those not fully versed in the nuances of plan accounting leading to misinterpretation and a potentially skewed vision of a plan’s financial position.
“If you are looking to see what the real cost of the plan is we would now get two different figures,” said Angelo. “Public plans are under increased criticism and so in 50 years when the accounting costs come in as being higher than the funding cost then they will be asked ‘Why aren’t you funding that?’ Going the other way, if the market goes up plans could even find they show pension income for that year so what happens then?”
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