State and Local Pension Accounting

Being a government employee comes with benefits that are far surpassed by the cons of being under constant regulatory and budget scrutiny. Advancement and pay increases are typically pre-defined and are turned into a waiting game rather than a goal to be reached to effort and skill. Speed and quality of resources can be delayed and impaired by budget shortfalls and cuts. What seems to make a government employee career worth-while is the pension policy which after a pre-defined period of service, provides remaining life income and benefits equal in value ranging from a percent based up to and including full final year total income. Employees contribute percentages of incomes to pension pools managed by outside organizations, which when combined with government contributions are designed to cover future benefit obligations using market growth rates and contributions. The 2008-2009 economic decline resulted in a near flat decade of asset growth, highlighted the serious under-funding through contributions and a unsustainable reliance on market growth to meet pension obligations.

According to a 2010 report by the Pew Center on the status of state pension obligations, the gap between pension assets and liabilities is in excess of one trillion and represents a massive long term liability and deficit that until recently where not reported on state and local balance sheets. Prior to June 15th, 2013 the Government Accounting Standards Board (GASB) did not require state and local governments to report their long time pension obligations on balance sheets, contrary to the Financial Accounting Standards Board (FASB) which requires pension obligations to be reported both short and long term liabilities. Similar to the private sector who are forced to expense pension accrual shortfalls, current due pension obligations that were short funded fall upon the state and local taxpayers who are forced to divert the tax funds from vital services and resources to non-productive pension obligations.

Due to pressure from politicians, bondholders, taxpayers, government workers and all those who had a vested interest in state and local governments, the GASB issued statements designed to better reflect existing benefit liabilities on GASB balance sheets. On June 25th, 2012 the GASB approved Statement No. 67, Financial Reporting for Pension Plans and Statement No. 68, Accounting and Financial Reporting for Pensions which are to be placed into effect on all Financial Statements for fiscal years starting on June 15th, 2013 require reporting entities to disclose their net pension liability which represents the difference between the total pension liabilities and the assets available for funding.

Outside the balance sheet, the GASB also requires to provide additional information on pensions through the Notes to Financial Statements. Required information is to include “the portion of the actuarial present value of projected benefit payments to be provided through the pension plan to current active and inactive plan members that is attributed to those members’ past periods of service (the total pension liability), the pension plan’s fiduciary net position, the net pension liability, and the pension plan’s fiduciary net position as a percentage of the total pension liability.” Furthermore reporting entities are reporting to list significant assumptions which include assumptions of estimated inflation, salary increases, benefit requirements, cost of living adjustments, discount rates and any other assumptions vital to formulating projected pension obligations.

With the recently enacted changes in GASB pension accounting, reporting entities will have to accumulate and report the most recent ten years of employer and non-employer obligations and include the sources of changes in the net pension liability and components of the liability and related ratios. All plan obligations that are determined through actuary estimates will be required to include the most recent ten years of “actuarially determined contribution, contributions to the pension plan and any significant methods and assumptions used in calculating the actuarially determined contributions.”

GASB Chairman Robert Attmore in a statement said “”The new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations” and AICPA further commented through a statement released by AICPA President and CEO Barry Melancon stating “The new GASB standards will benefit users of these financial statements, as well as taxpayers, since state and local governments for the first time will have to report unfunded pension liabilities in their balance sheets, providing a clearer view of pension obligations.”

GASB Statement No. 67 and 68 have finally caught up and addressed the serious pension obligation shortfalls which for the first time are now reflective on governmental balance sheets. No longer are pension liabilities capable of being ignored and will allow all stakeholders with these governmental entities to create accountability and force legislators to work in a bipartisan manner to resolve the now very transparent pending pension implosion.

Works Cited

1. GASB. GASB vote places unfunded pension liabilities on government balance sheets. 15 June 2012. 17 July 2013.
2. GASB. Summary of Statement No. 67 Finacial Reporting for Pensions. 12 June 2013. 17 July 2013.

Planning Retirement Pensions

Planning retirement pensions encompasses everything around planning the most productive use of you money, both now while you can appreciate the advantage of them, and subsequently when you are reasoning with transferring some of your assets to your inheritors. Retirement planning is centred on the purpose of a lifetime cash flow prediction, which will assist you deciding whether the retirement revenue from all present sources is sufficient to supply the needed income during retirement. The process is undertaken through arranging your affairs so that you are in a situation to accomplish your monetary and individual targets at retirement. As the State proceeds to lessen it’s accountability to plan for retirement benefits at a degree satisfactory to many pensioners, and rather encourage retirement planning on a more personal level, individuals are having to progressively reach out to corporations to meet their retirement planning requirements.

Retirement planning is the operation of setting up plans and systems for the gathering of wealth and for fund withdrawal throughout retirement years. This is a complex area and is generally completed by financial experts who experience a lot about retirement considering that they work with the financial issues of many individuals regularly. In a recent survey undertaken retirement planning and retirement income crowned a list of customers’ principal money concerns, with 54% of financial consultants saying that this is the crucial worry for customers. Retirement planning is not just about pensions however it really centres on working out how much money you require to fund the way of life you want to achive after retirement and then discovering ways to fund it.

The initial step to retirement planning is to institute an precise and practical retirement income target. Pensions, with their decidedly beneficial tax status do form a decisive piece of retirement planning. If you plan to retire ahead the State Pension age, extra planning is ordinarily needed as you will not be able to draw upon your state pension up to the time you do attain State Pension age. You may even hope to conceive about planning the impacts of Inheritance Tax on your Estate and contemplate if it would be smart to move a share of your current wealth to your children or grandchildren.

Planning retirement pensions funds in the UK profit from significant tax incentives and there are a diversity of pension arrangements to chose from including the Personal pension plan, Stakeholder pension, Executive pension plans and many more. These are a selection of the most favoured models of pensions, there are however many further differences.

The Authorities are at present trying to stimulate more individuals to build up pension wealth of their own with the commencement of Stakeholder Pensions and modifications to Contracting Out from the State Earnings Related Pensions (SERPS) or the shortly to be established State Second Pension (S2P). These cause the rise in the value of a pension fund to accumulate tax free and permit some of the fund to be drawn in the shape of a tax free lump sum. The bulk of pension plan models provide tax relief at source which means that you just pay off the net sum.

Planning for your retirement is significant considering that it enables you to fund your lifestyle following retirement without the workplace income you have been used to. It is almost certainly the most significant financial decision you can undertake and planning is essential if you hope to delight in the latter stages of your life in comfort. If you are retiring next year or in the following 10 to 20 years, preparation at this moment in time will very much enhance your financial tomorrows.

It is extremely significant to seek independent financial advice when planning retirement pensions so that your tax liabilities and assets correspond with your desires and personalised information to suit your way of life and retirement intentions. By producing, reassessing and improving your planning retirement pensions you boost the opportunities of living a financially secure retirement by maximizing the revenues on your assets as well as your entitlement to any social security benefits.

When Do You Transfer a Locked in Pension Plan?

When Can I Do this?

Generally speaking, this can be done when you are leaving an employer, or when the pension plan is being dissolved, wound up or merged. You will generally be told that these situations are happening, but due to the complexity of pension plans, most people will leave the funds where they are until retirement and then take a smaller or “deferred monthly payment” when they reach retirement age. Retirement age is the age when you can start withdrawing money as mandated by the plan. It is not necessarily a particular age – some plans allow you to withdraw at age 55, age 60, age 65 or somewhere in between. Some plans allow you to withdraw when you are younger, but it depends on how many years you have contributed to the plan. Other plans will allow you to withdraw money at age 55 or later, but the conditions will be different compared to age 65.

When I say a pension plan, this can be a Defined Benefit Plan (DB Plan) or a Defined Contribution Plan (DC Plan). The difference between these two types of pension plans are that with a defined benefit plan, the payments in retirement (or benefits) are predetermined at a certain amount per month and these are guaranteed by the plan sponsor (entity who operates the pension plan). Note that the contributions that you are making as a member of this plan can change at any time before retirement, and your payouts do not necessarily have to change to go along with the contributions. A defined contribution plan is when the amount of money put into your plan is predetermined, but the payments in retirement depend on how the money is invested. You will see the contribution as a deduction on your pay stub in both cases. How the money is invested is determined by you and is usually determined by what products (mutual funds or something similar) you choose and how they perform.

Why Would I Bother Transferring My Pension Plan?

In most cases, leaving retirement funds where they are is not a bad idea. It is easy, and there is the least chance of getting involved in something you don’t understand. I will highlight situations when you may consider moving money out of a pension plan because they are unusual circumstances, and transferring your money may benefit you. Keep in mind that as time goes by, these situations may become more common, and this decision should be kept open as a possibility.

Is Your Employer Going Bankrupt?

If your employer is in this category, or might be in the near future, the pension plan that it is contributing to may not be getting any money from the company. This means that the plan would have to rely on investment returns only, or eventually be wound up or closed down. Typically a pension plan relies on contributions from the company, employees and money generated through investment returns from past contributions. If you are working at a company, keep an eye on the company finances. Note that layoffs or outsourcing may not be a sign of bankruptcy, because many companies lay off people even when they are making large profits. Some companies outsource jobs even when they don’t need to. This is done to increase profits rather than protecting against losses.

Note that for a defined contribution plan, the company you are working for is not running the plan, but they still may contribute money on your behalf. You would need to examine who is providing the mutual funds or products that your money is invested in. In most cases, this would be an insurance company, bank or mutual fund company, and there wouldn’t be much concern unless the financial institution would need a bailout or has its own financial problems.

Are Your Contributions Going Up Quickly?

Are your pension plan contributions going up quickly? This information is easily found on your pay stub over time. Rising contributions may mean that the fund is running out of money, and needs these contributions to pay the bills. Rising contributions may mean other things as well, so it is advised to delve further into the state of the pension plan. You will need to see the funding status, or how much liability the fund has versus how much assets the fund has. A pension fund is like any business or entity. There must be adequate money to pay all the bills and ensure that the entity survives. This information tends to be complex, so it you want to find out what is happening, do your research and ask people in your company how to read the statements and what the numbers mean. If you need help interpreting the situation, ask a professional who can interpret the information for you.

Are Investment Returns Poor Over Many Years?

This is related to the pool of contributions of the defined benefit pension plan. A DB plan derives money from contributions and investment returns of money contributed to the plan in the past. The pension plan gives out money to pay benefits and pension income. If investment returns are poor, part of the equation is suffering. In general, poor returns for a year or two are usually recovered. If poor returns persist for many years, the funding status of the plan may be called into question. This is usually determined by an actuary every few years on average. If you are investigating plan contributions or the pension plan returns, always tie them together with the plan funding and see if there is a story unfolding. These items will be linked together.

Is the Company Switching from a Defined Benefit to a Defined Contribution Plan?

This is not an indicator of stress in itself. What can happen here though is that your retirement expectations would be changed because the original promised payments will be different if the plan type changes. You would need to go through your current scenario and what would happen if the new type of plan were instituted. These calculations require a lot of forecasting, and can be very complex, so allow a lot of time and if needed, obtain the advice of a financial professional who can interpret the risk and rewards in different scenarios. Allow a lot of time to make this decision because the changes can be significant over your working career. Many companies are changing from defined benefit plans to defined contribution plans to save money and reduce future payments. This may not mean that your pension plan is in trouble – it may mean that the employer is trying to increase profits. This has changed from years ago where companies tried to pay as much as they could to retain employees. Nowadays, companies may pay as little as they can to still retain the same employees. Pensions and other benefits are viewed as costs like salaries or bonuses, so they will be minimized over the long run if it is deemed necessary to do so.

Is Your Company Being Merged or Bought By Another Company?

This event in itself may not trigger any issues, but it will depend on why the company was bought. If the company you work for has bought another company, there wouldn’t be too much concern. If the company you work for was the target of the takeover, then you should take notice. Some companies announce a “merger of equals” when in fact there was a takeover. Make sure you understand why the merger really happened. The keys to knowing this are: Who will control the new entity after the buyout? Who is making the decisions in the new entity? If it is your former bosses, you are part of the acquirer company. If you find that you are getting orders from the other company, then you are part of the target company. If you are part of the acquired company, there are situations when the pension plans may also get merged. The merged entity may decide to save money be changing the plan type, reducing benefits or eliminating the pension plan altogether. Be aware of what is happening in the months following a merger to see what is being contemplated.

How Do I Actually Do the Transfer?

If you find you are in a situation where you have to decide whether to leave the pension plan where it is or transfer it out, treat it as a major retirement decision. If you do transfer your pension plan, it will become a locked in retirement account (LIRA), and the money would be transferred to another institution. The institution can be a bank, mutual fund company, insurance company or other enterprise. Since the retirement funds are locked in, there are no tax consequences of the transfer itself. You will only pay taxes once the money is withdrawn, and this is part of your conversation when doing your retirement planning. Once the money is transferred to the institution, you will generally have to manage the funds on your own, or hire someone to do it for you, which could be your broker, financial planner or financial advisor/counselor. This would be managed like RRSPs or other monies that you would invest for retirement.

To do the transfer, there are some forms that are required. Some of these are required by the government and others by your employer and the institution. Make sure to ask who your money is coming from (your employer) and who the money is going to (the institution) and the government to know what forms are needed. When you actually do the transfer, if it is a defined contribution plan, the amount accumulated up to the date of the transfer is available on the statement of the plan. For a defined benefit plan, this valuation or commuted value is more complex. Generally, the amount accumulated equals your contributions plus employer contributions plus the guaranteed rate of return over the time period in which you were part of the plan. The plan sponsor would have to provide you with this number, or can provide you with calculators to help you estimate the value yourself.

Should the decision to transfer a locked in pension plan presents itself to you, make sure to allow a lot of time and have all the information on hand to make a wise decision.