Pensions under GASB 68: net pension liability, deferrals and employer types

• Calculate the net pension liability from the total pension liability and fiduciary net position
• Separate changes recognized immediately in pension expense from changes deferred
• Distinguish single, agent and cost-sharing employers
• Plan audit procedures over census data, actuarial reports and plan auditor reports

Scope and employer types

GASB Statement No. 68 covers state and local government employers whose pensions are provided through plans administered as trusts that meet three tests: contributions and their earnings are irrevocable, plan assets are dedicated to paying pensions under the benefit terms, and plan assets are legally protected from the creditors of employers, nonemployer contributing entities and the plan administrator (and, for defined benefit plans, plan members). Statement 67 covers the plans themselves.

Employers fall into three categories:

• Single employers: the plan covers employees of only one employer.
• Agent employers: assets are pooled for investment, but each employer has a separate account legally available only for its own employees.
• Cost-sharing employers: obligations and assets are pooled, and assets can pay benefits for any employer's employees. A cost-sharing employer reports its proportionate share of the collective net pension liability, expense and deferrals.

Measuring the liability

The total pension liability is the portion of the actuarial present value of projected benefit payments attributed to past service of current active and inactive employees. The net pension liability is the total pension liability less the plan's fiduciary net position.

Key measurement rules:

• Projections include projected salary changes, service credits and automatic COLAs, plus ad hoc COLAs that are substantively automatic.
• The discount rate is a single rate that blends the long-term expected rate of return (to the extent plan net position is projected to cover benefits) with a tax-exempt, high-quality municipal bond rate (for periods after that).
• Attribution uses the entry age actuarial cost method, with service cost as a level percentage of pay.
• Actuarial valuations are required at least every two years. If the valuation is not as of the measurement date, it is rolled forward from a valuation no more than 30 months and 1 day before the employer's most recent year end.
• The measurement date is no earlier than the end of the employer's prior fiscal year, applied consistently.

Pension expense and deferrals

Most changes go into pension expense immediately: service cost, interest on the total pension liability, changes of benefit terms, projected earnings on plan investments (as a reduction), employee contributions (as a reduction) and pension plan administrative expense.

Three items are deferred:

• Differences between expected and actual experience, and changes of assumptions or other inputs, are recognized over a closed period equal to the average expected remaining service lives of all employees in the plan, active and inactive, beginning with the current period.
• Differences between projected and actual investment earnings are recognized over a closed five-year period.
• Employer contributions made after the measurement date are reported as deferred outflows of resources.

Governmental funds

In governmental funds, the net pension liability is recognized only to the extent it is normally expected to be liquidated with expendable available financial resources. Pension expenditures equal amounts paid to the plan plus the change in that fund liability.

Notes and RSI

Notes describe the plan and benefits, the assumptions, the discount rate inputs and the net pension liability calculated with a discount rate 1 percentage point higher and 1 percentage point lower. RSI for single and agent employers presents, for each of the 10 most recent fiscal years, the sources of changes in the net pension liability and the components of the liability and related ratios, plus a 10-year schedule of contributions: actuarially determined contributions when they exist, otherwise the statutorily or contractually required contributions.

Audit approach

For a cost-sharing employer the main evidence is the plan's audited schedule of employer allocations and schedule of pension amounts, with the plan auditor's report. Test the census data your client sent to the plan (hire dates, pay, status) and test the employer's contributions. For single and agent employers, evaluate the actuary as a management's specialist, test census data, and assess the discount rate and assumptions. The ASC 715 pension guide shows how the private-sector model differs, and the GASB vs FASB comparison summarizes the gap.

Pension expense for a single employer