New Municipal Pension Accounting Rules Draw Attention to Unfunded Liabilities

New accounting and financial reporting standards for U.S. state and local government pension and benefit funds start to take effect this month. Confusion is likely to ensue as taxpayers, plan participants, and even plan sponsors take a hard look at new numbers that more clearly identify funded or unfunded municipal pension liabilities.

The new rules separate pension accounting from pension funding by changing the focus from a sponsor’s cost of funding the benefits to the employer’s pension liability.

The General Accounting Standards Board (GASB) is the independent standards-setting organization behind the changes, which include two sets of new rules issued on June 25, 2012. Highlights of the rule changes, as described in part by the GASB, are described below.

GASB Statement 67: Financial Reporting for Pension Plans

This Statement requires defined benefit pension plans to present two financial statements: 1) a statement of fiduciary net position; and 2) a statement of changes in fiduciary net position.

The total pension liability, as determined by actuarial valuations, must be performed at least every two years. Notes to financial statements of defined benefit pension plans must also include more descriptive information.

Statement 67 is effective for plan fiscal years beginning after June 15, 2013. For plans with a December 31 fiscal year end, Statement 67 will apply to the December 31, 2014 financial statements.

It replaces the requirements of Statements No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and No. 50, Pension Disclosures, as they relate to pension plans that are administered through trusts or equivalent arrangements. Pension plans not administered through a trust remain subject to the earlier rules of Statements 25 and 50.

GASB Statement 68: Accounting and Financial Reporting for Pensions

This Statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources, and expense/expenditures. GASB 68 defines how benefit expense calculations and payments should be calculated, including guidance on discount rates and the determination of net present value.

Statement 68 will apply to employers and “nonemployer contributing entities” (“NCEs”) for fiscal years beginning after June 15, 2014. For plans with a December 31 fiscal year end, Statement 67 will apply to the December 31, 2015 financial statements.

Key Changes in New GASB Pension Rules

Primary changes contained in GASB Statements 67 and 68 include:

• The plan sponsor’s “total pension liability” (“TPL”) is similar to the “actuarial accrued liability” (“AAL”), but must:

o Use the Entry Age Normal Cost method
o Use a blended discount rate based on the long-term rate of return and municipal bond rates
o Recognize ad hoc “Cost of Living Adjustments” (“COLAs”) if essentially automatic

• A number representing the plan sponsor’s “net pension liability” (“NPL”) will appear on the plan sponsor’s balance sheet. Municipalities that previously appeared to be in sound financial condition may find that the inclusion of significant unfunded pension liabilities on the balance sheet will rattle taxpayers, investors, and plan participants.

• A “pension expense” (“PE”), which differs from a plan sponsor’s “actuarially determined contributions” (“ARC”), will appear on the sponsor’s income statement.

• Historic requirements in regard to financial reporting disclosures will be replaced with information based on the new measures.

• The discount rate used to calculate future obligations may change, depending on the plan’s funding levels.

• Allowable amortization periods of investment gains or losses will be shortened. A process known as “smoothing” liabilities over time is being eliminated, which is likely to create greater volatility.

As readers can tell, the rule changes are highly technical. Plan sponsors and employers will help participants and taxpayers understand the full impact of individual plans.

Three Types of Municipal Pension Plans Addressed

Accounting and financial reporting pension rules will vary based on the type of municipal plan sponsor. The three types of plans subject to Statements 67 and 68 include:

1. Single-employer pension plans.

2. Agent multiple-employer pension plans. In these plans, assets from multiple pensions are pooled for investment purposes. Each employer plan retains individual responsibility for funding and benefit payments.

3. Cost-sharing multiple-employer pension plans. In these plans, both assets and payment mechanisms are pooled across multiple employers.

In Summary

The GASB rule changes were issued after an extensive public comment period, including a 2009 Invitation to Comment, the circulation of preliminary documents in 2010, multiple hearings, and a June 2011 exposure draft. While actuaries, investment professionals, and sophisticated plan sponsors have debated the pros and cons of pension reform in financial reporting, the taxpayer remains largely ignorant of unfunded pension liabilities.

According to the Pew Charitable Trusts, “the gap between the promises states have made for public employees’ retirement benefits and the money they have set aside to pay these bills was at least $1.38 trillion in fiscal year 2010.” As these changes show up on municipal financial statements over the next two to three years, watch for even greater taxpayer concern over pension and municipal deficits. Pension litigation is likely to ensue.

The New Flat Rate State Pension – Is It Worth It?

The reform of State Pensions gained pace earlier this year with plans being put forward by the Government to be discussed in Parliament.

The second reading, which was due on 17th June, would then mean that an MPs’ committee would look at the proposals in detail. So this is not yet ratified and changes could well be made.

So what is this proposed new single-tier State Pension all about, why is it being introduced and how will it affect you, if at all?

Key reasons why the Government want to change things are:

– The existing system is complex

– There are high levels of means-testing

– It creates inequality, eg women overall tend to have a lower State Pension than men.

So they want to introduce a system that aims to make matters simpler, fairer and be easier for people to plan ahead by having more certainty about what their State Pension will actually be.

The changes:

– The proposed new pension will be £144 per week in today’s money compared to around £110 per week now

– You will need 35 years National Insurance (N.I.) contributions, not 30 as is the position now

– You will not qualify for any pension if you have less than 10 years N.I. contributions

– Only your own N.I. contributions will be taken into account, so no claim is eligible on a partner’s working history (married couple’s pension will be abolished)

– All top-up pension arrangements will cease (such as State Second Pension)

– It is possible to build qualifying years even if you take time out from working to raise a family

– You can no longer defer taking your State Pension in exchange for a lump sum

What hasn’t changed:

– Your pension will rise in line with average earnings, the Consumer Prices Index or 2.5% as at present

– You will still be able to delay your pension in exchange for a higher pension

So when are these changes due to take effect?

As mentioned, although the finer detail may yet be altered, the current expectation is that the new higher flat rate pension will be introduced by 2017 at the earliest.

However, in the budget this year it was announced that those reaching state pension age on 6th April 2016 will then qualify for the new amount when it is introduced. A key point here is that those who are in receipt of the state pension before that date will not be eligible for the increase.

It has also been made clear that choosing to defer drawing your pension won’t mean you qualify for the higher pension.

Some common questions are:

Q. Has the age at which I will qualify for a state pension changed?

A. No. The status quo applies with women retiring at 65 by 2018. Then for men and women it will rise to 66 between 2018 and 2020. By 2026, it will have risen to age 67.

The Telegraph reports that reviews will be carried out every five years, based on the principle that people should receive their state pension for a specific proportion of their adult life. This means that, as life expectancy increases, the state pension age will also rise.

Q. What if someone works out that they will not have the required 35 years of N.I. contributions – what will this mean to their pension and what action can they take to buy extra years?

A. Taking an example where someone has built up, say, 30 qualifying years, they will receive 30/35ths of the full flat rate.

It is possible for this person to ‘buy’ the missing years, although this needs to be done within 6 years of those that are missing. Subject to this rule, you can still buy years after retiring.

Q. Is the State Pension worth bothering about?

A. Some individuals do not realise how much income a couple of a similar age can actually have each month.

With the new state pension levels, and presuming a couple qualify for the maximum, we are talking about a joint pension of around £15,000 pa, or £1,250 per month!

Not to be sniffed at!

In Summary

The government want this whole exercise to be cost neutral.

This suggests that, as ever, there will be winners and losers.

Age UK summarise by saying that, overall, they expect the lower paid and self-employed to benefit and higher earners to lose out.

Indeed, as Minister for Pensions Steve Webb said:

“Our reforms will create a simple, decent State Pension, which is set above the basic means test. The new State Pension will be fairer to the low-paid, the self-employed and carers and make it easier for people to understand what they will get from the State when they reach State Pension age.”

Please note that this article is by no means fully comprehensive and merely highlights the major changes as we see it. As stated, further changes and amendments may well be made.

Key Considerations

This is the biggest shake up for State Pensions, possibly since their introduction. It’s vital you work out your N.I. service and how these changes will affect you and your spouse or partner.

Action Point

Be informed and take action!

Do you know your (and spouse?) N.I. contributions history?

Will you be able to achieve the maximum state pension?

Ask your financial adviser to check.

Pension Transfers – Should I Be Thinking of One?

Despite the quite considerable contributions individuals are likely to be making to them and the accumulated value they are likely to have, it is surprising how few people keep an eye on how their pension fund investments are doing. The contributions are made on the same monthly basis, come what may, regardless of the investment’s comparative performance. It seems that many people give no thought to the possibility of pension transfers and whether such a move would make sense for them.

Whether a pension transfer is something you should be considering, of course, will depend on the performance of your current pension fund. Together with your home, this is likely to be one of your larger investments and, as with any investment, you will want to make sure that your hard-earned money there is working as hard for you as it possibly can. With the value of your home, for example, you probably follow every twist and turn of local property prices and keep a fairly close watch on just how much it is worth. How many people do the same with their pension investments?

With your pension fund, it is not just the overall value and performance you will be interested in. Have you recently reviewed what management or administration fees you are paying? Could you get a better deal for less?

Ready to transfer?

If you believe it is time for a change, there are one or two things you should definitely do first before committing yourself to a transfer:

– Above all, do not consider transferring your pension without seeking the expert advice of a registered independent financial adviser;

– If you have not done so already, one of the first things your adviser will ask to see is a transfer value analysis. As the title suggests, this is an analysis which allows you to compare the value and performance of your current pension investments with the alternatives. It should include a figure called the “critical yield” (typically somewhere between 7% and 11%) which tells you how fast any replacement scheme would need to grow to match the performance of your present scheme. A good rule of thumb will be a figure of 8%. If your present scheme is returning anything less than this, then you might want to take the idea of a pension transfer further;

– What are your intentions regarding retirement? When do you hope to start drawing on your pension? If you are planning to retire early, for example, you will need to ensure that any replacement scheme to which you are intending to transfer is sufficiently flexible to allow this;

– With the help of your independent financial adviser, you will naturally want to check again the current financial position and performance of your present scheme. In the event that it is showing a surplus, with a higher value on assets than liabilities, then it could well prove worthwhile staying with your present pension fund.


It is certainly worth reviewing and monitoring your pension fund in the same way that you would any other investment, to consider the potential benefits of a pension transfer:

– Financial performance, management costs and flexibility might be a useful basis for comparison;

– Before doing anything, however, make sure that you seek the services of a reputable, independent financial adviser;

– Get a transfer value analysis of your current pension scheme;

– Take into account your actual retirement plans and any intention you might have to retire early.