GASB 74/75: OPEB expense and balance sheet items

New accounting rules in the United States for postemployment benefits other than pension (OPEB), first implemented in 2016, are now in effect. Successful implementation of the new rules will require an understanding of a variety of technical concepts regarding the newly required calculations.

This article by Milliman actuary Rebecca Ross explores OPEB expenses and balance sheet items. Rebecca discusses the new requirements for disclosing OPEB expense and the effect these changes will have on plan and employer financial statements.

This article is part of the Governmental Accounting Standards Board Statement 74 and 75 miniseries. 

Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

IRS umbrella closing agreement program allows providers of preapproved plan to correct missed deadlines
The April 30, 2016, deadline for preapproved plan adopters to sign a restated plan that complies with the Pension Protection Act has passed. After the first six-year cycle for preapproved plans ended on April 30, 2010, many Voluntary Correction Program (VCP) submissions were received from plan sponsors who didn’t sign a restated plan by the deadline.

While plan sponsors may continue to make VCP submissions for correcting a failure to restate their plans by the deadline, the Internal Revenue Service (IRS) invites financial institutions or other service providers to submit proposals for umbrella closing agreements to correct the same failure on a larger scale by addressing employers affected by the failure as a group.

To learn more, click here.

PBGC issues comment request notice on locating and paying participants
The Pension Benefit Guaranty Corporation (PBGC) requests that the Office of Management and Budget (OMB) extend approval, with modifications, of a notice to enable PBGC to pay benefits to participants and beneficiaries.

This information collection is needed to pay participants and beneficiaries who may be entitled to pension benefits from plans that have terminated. It consists of information participants and beneficiaries are asked to provide in connection with an application for benefits. In addition, in some instances, PBGC requests individuals to provide identifying information so that it may determine whether the individuals may be entitled to benefits. All requested information is needed so that PBGC may determine benefit entitlements and make appropriate payments

To learn more, click here.

Corporate pensions’ funded ratio rises to 91.6% despite investment losses in April

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In April, these pensions experienced a $20 billion improvement in funded status thanks to an increase in the corporate bond rates used to measure pension liabilities. From March 31, 2018, through April 30, the monthly discount rate increased 12 basis points, from 3.91% to 4.03%; as a result, pension liabilities decreased by $26 billion for the month. The funded ratio for the PFI plans increased from 90.6% to 91.6%, despite a 0.11% investment loss that reduced index assets by $6 billion.

Corporate pensions continue to get some discount rate relief in 2018, despite volatile equity markets. Over the past 12 months, with the rise in rates and a 6.17% cumulative asset gain for these plans, we’ve seen the funded ratio climb from 85.5% to 91.6%.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.43% by the end of 2018 and 5.03% by the end of 2019) and asset gains (10.8% annual returns), the funded ratio would climb to 101% by the end of 2018 and 117% by the end of 2019. Under a pessimistic forecast (3.63% discount rate at the end of 2018 and 3.03% by the end of 2019 and 2.8% annual returns), the funded ratio would decline to 87% by the end of 2018 and 81% by the end of 2019.

To view the complete Pension Funding Index, click here. This May PFI publication reflects the annual update of the Milliman 100 companies and their latest financial disclosures. To see the 2018 Milliman Pension Funding Study, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.

What must pension administrators consider to correct plan errors?

In defined benefit (DB) plan administration, errors can occur in following the provisions of the plan document, applying regulatory guidelines, or processing plan data. DB plan administration errors, or failures, can have serious consequences, including disqualification. Fortunately, the Internal Revenue Service has established programs for correcting errors in a relatively easy manner.

Failure to administer a plan in accordance with the plan document and applicable regulations can result in severe tax consequences. If a plan is disqualified, the plan’s trust loses its tax-exempt status and this affects the plan sponsor’s ability to deduct plan contributions. Additionally, contributions are subject to Social Security, Medicare, and federal unemployment taxes and trust earnings are subject to income tax. Plan distributions are no longer eligible for rollover to another eligible retirement plan or IRA.

In order to correct plan failures completely, you must start with a plan. In this article, Milliman’s Mary Hart discusses several ways to correct plan errors.

Public pension funding falls back to 71.4% in the first quarter of 2018

Milliman has released the 2018 first quarter results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans. In Q1, these plans experienced a $93 billion loss in funding, largely resulting from volatile equity markets that produced an aggregate -0.75% investment return for these plans. In comparison, the PPFI investment return for 2017 Q4 was 3.24%. From January 1, 2018, to March 31, 2018, the PPFI pensions saw their funded status drop from 73.1% to 71.4%.

After more than a year of running smoothly, the market stubbed its toe in Q1. As a result, much of last year’s robust pension funding gains were washed away in early 2018.

No plans in our index seem to have made it through the first quarter of 2018 unscathed, with estimated returns ranging from a low of -1.91% to a high of -0.03%; the Milliman 100 PPFI deficit grew from $1.332 trillion to $1.425 trillion during Q1. The losses resulted in six plans dropping below the 90% funded mark, with 15 plans now over 90% funded, down from 21 as of 2017 Q4. At the other end of the spectrum, 26 of the 100 plans now have funded ratios below 60%, with 10 plans that remain below 40% funded.

To view the Milliman 100 Public Pension Funding Index, click here.

To receive regular updates of Milliman’s pension funding analysis, contact us here.

Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

DOL announces temporary nonenforcement policy on fiduciary conflict rules
The U.S. Department of Labor (DOL) released Field Assistance Bulletin (FAB) 2018-02, which announces a temporary enforcement policy on prohibited transaction exemption (PTE) rules applicable to investment advice fiduciaries. The FAB states that, temporarily, the DOL will not pursue prohibited transaction claims against investment advice fiduciaries (advisers and broker-dealers) who are working diligently and in good faith to comply with the 2016 fiduciary rule that became applicable June 9, 2017. The nonenforcement period will extend until after the DOL issues regulations or exemptions or other administrative guidance.

For more information, click here.