Defined Benefit Pension Plans
Easterday, Kathryn E., Eaton, Tim V., The CPA Journal
Understanding the Differences Between the Public and Prívate Sector
Accounting and financial reporting for defined benefit (DB) pension plans provide needed information to a wide variety of corporate and governmental stakeholders, including active workers, retirees, investors, voters, and taxpayers. DB pensions represent an employer's real obligations to its active and retired employees - promises that must be honored. Unfortunately, the pension obligations of many organizations are outpacing their ability to fund them. In the case of the American Airlines bankruptcy, the company reported approximately $8 billion in pension assets to cover $18 billion in pension obligations to its employees (Mike Spector, "Filing Puts Pension Benefits at Risk," Wall Street Journal Online, November 30, 2011). The third quarter of 2011 was the second-worst quarter in history for corporate pensions because plunging market prices dramatically devalued invested pension plan assets, creating or exacerbating underfunded pension obligations (Vipal Monga, "The $440 Billion Pension Gap," Wall Street Journal Online, November 30, 201 1).
In addition to significant funding problems, accounting professionals and the general public have recently raised concerns that the differences in accounting and reporting rules for DB pensions that exist between FASB and the Governmental Accounting Standards Board (GASB) add unnecessary confusion to stakeholders' attempts to understand an already complex topic. The accounting and financial reporting for pensions under both FASB and GASB are examined below, along with the two key drivers in computing total pension obligations: pension obligation discount rates and expected rates of return on plan assets. These two assumptions play key roles in determining the magnitude and funding status of DB pensions, and corporate and governmental entities make very different assumptions about them.
Scope of the Issue
Millions of active and retired workers rely on DB pension plans to finance their retirement years. In the private sector, many companies offer multiple DB plans covering various groups of employees; in the public sector, individual pension plans for state and local employees are often managed and operated by state pension systems. Most states have one or two public pension systems, but some states have more. (The sample analyzed here includes 10 states with data reported for between three and seven pension systems.) Each public pension system represents at least one - and possibly multiple - individual DB pension plans covering various groups of state and local government employees.
Future pension obligations of both companies and state governments collectively amount to trillions of dollars; obligations of numerous pension plans can be measured individually in billions of dollars. Public sector pension obligations generally dwarf those in the private sector. Exhibit 1 shows mat the mean total pension obligation of the private sector has ranged from $0.8 billion in 2001 to $2.1 billion in 2010 and averaged nearly 25% of annual revenues during mat time. In Exhibit 2, the mean pension obligations for public employee systems ranged from $20.3 billion to $35.4 billion over the same period; on average, they represent a staggering 350% to 560% of annual state revenues.
While it is true that total pension obligations do not need to be paid out all at once, the exhibits suggest that, compared to the private sector, public sector pension obligations represent a much larger - and quickly growing - demand on available resources. The problem has been worsened by the recent economic downturn: DB pension obligations to employees remain consistent, even as revenues decline.
Comparison of FASB and GASB Rules
Under Accounting Standards Codification (ASC) 715-30-25 (Statement of Financial Accounting Standards [SFAS] 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans), FASB requires mat companies report their DB pension funding status on their balance sheet. …