In August 2012, the Governmental Accounting Standards Board (GASB) published final accounting regulations for U.S. public pension funds. The new rules will be effective beginning in 2013 for pension plans and 2014 for employers.
At the heart of the new GASB accounting rules is a fundamental separation between funding and accounting. Under the previous rules, plans calculated a GASB annual required contribution (ARC). The ARC is frequently used as a funding measure due to its consistency with certain actuarial funding principles. Plans are not required to contribute the ARC; however, any shortfall or excess contribution is accumulated from year to year into a number called the net pension obligation (NPO). The NPO appears in the notes to financial statements.
Under the new GASB rules, no such metric as the ARC will be specified. Rather, a balance sheet liability and an income statement expense will be calculated. The liability, referred to as the net pension liability, will closely resemble the number currently referred to among actuaries as a “market value of assets unfunded accrued liability,” with certain restrictions imposed on the calculation methodologies (including the discount rate). Disclosing the volatile net pension liability as a line-item on the balance sheet will be a big change for many employers. The income statement expense number, referred to as pension expense, will be designed to meet accounting definitions of period-specific accrual, and will likely be subject to high volatility because of the specific calculation instructions in the new GASB rules. GASB has made it very clear that neither the net pension liability nor the pension expense numbers should be used for funding purposes.
In the absence of any useful accounting metric for funding policy guidance, it will fall to other entities to develop any across-the-board funding standard in the public pension community. This represents an opportunity to enhance the understanding of what it means to fund plans responsibly; the GASB ARC was considered by many actuaries to be insufficient for long-term plan funding. Actuarial entities such as the Conference of Consulting Actuaries (CCA) and the California Actuarial Advisory Panel (CAAP) are currently in the process of deliberating on guidance for funding of U.S. public pension plans. Ultimately, the funding policy decision for each plan will remain, as always, with plan sponsors, retirement system boards, and legislative bodies.