In: Accounting
Identify types of pension plans and their characteristics.
Pension plans are distinguished for financial reporting purposes in two ways.
Plans are classified by whether the income or other benefits that the employee will receive at or after separation from employment are defined by the benefit terms (a defined benefit plan)
Whether the pensions an employee will receive will depend only on the contributions to the employee’s account, actual earnings on investments of those contributions, and other factors (a defined contribution plan).
In addition, defined benefit plans are classified based on the
number of governments participating in a particular pension plan
and whether assets and obligations are shared among the
participating governments.
Categories include plans where only one employer participates
(single employer); plans in which assets are pooled for investment
purposes, but each employer’s share of the pooled assets is legally
available to pay the benefits of only its employees (agent
employer); and plans in which participating employers pool or share
obligations to provide pensions to their employees and plan assets
can be used to pay the benefits of employees of any participating
employer (cost-sharing employer).
DEFINED BENEFIT PENSION PLANS
The Statement requires governments that participate in defined
benefit pension plans to report in their statement of net position
a net pension liability. The net pension liability is the
difference between the total pension liability (the present value
of projected benefit payments to employees based on their past
service) and the assets (mostly investments reported at fair value)
set aside in a trust and restricted to paying benefits to current
employees, retirees, and their beneficiaries.
The Statement calls for immediate recognition of more pension
expense than is currently required. This includes immediate
recognition of annual service cost and interest on the pension
liability and immediate recognition of the effect on the net
pension liability of changes in benefit terms. Other components of
pension expense will be recognized over a closed period that is
determined by the average remaining service period of the plan
members (both current and former employees, including retirees).
These other components include the effects on the net pension
liability of (a) changes in economic and demographic assumptions
used to project benefits and (b) differences between those
assumptions and actual experience. Lastly, the effects on the net
pension liability of differences between expected and actual
investment returns will be recognized in pension expense over a
closed five-year period.
Statement 68 requires cost-sharing employers to record a liability
and expense equal to their proportionate share of the collective
net pension liability and expense for the cost-sharing plan.
The Statement also will improve the comparability and consistency
of how governments calculate the pension liabilities and expense.
These changes include:
DEFINED CONTRIBUTION PENSION PLANS
The existing standards for governments that provide defined
contribution pensions are largely carried forward in the new
Statement. These governments will recognize pension expenses equal
to the amount of contributions or credits to employees’ accounts,
absent forfeited amounts. A pension liability will be recognized
for the difference between amounts recognized as expense and actual
contributions made to a defined contribution pension plan.
SPECIAL FUNDING SITUATIONS
Certain governments are legally responsible for making
contributions directly to a pension plan that is used to provide
pensions to the employees of another government. For example, a
state is legally required to contribute to a pension plan that
covers local school districts’ teachers.
In specific circumstances called special funding situations, the
Statement requires governments that are nonemployer contributing
entities to recognize in their own financial statements their
proportionate share of the other governmental employers’ net
pension liability and pension expense.