Upcoming pension changes – part II

If your government has employees who are part of the Wisconsin Retirement System (WRS), the Illinois Municipal Retirement Fund (IMRF), and/or the Teachers’ Retirement System (TRS) of Illinois, this article will be of interest to you. It addresses some of the specific implementation matters of the new pension reporting standards including those related to single- employer pension plans that are prevalent at many local Illinois governments.

As reported in "Upcoming pension changes – part I" our article last fall, upcoming pension changes related to the issuance GASB No. 67, Financial Reporting for Pension Plans – an amendment of GASB Statement No. 25 and GASB No. 68, Accounting and Financial Reporting for Pensions – an amendment of GASB Statement No. 27, will be forthcoming. GASB No. 67, which impacts the pension plan, is effective for fiscal years beginning after June 15, 2013, or June 30, 2014, year ends. GASB No. 68, which impacts the employer, is effective one year after GASB No. 67 for fiscal years beginning after June 15, 2014, or June 30, 2015, year ends. WRS, IMRF, and TRS have been reviewing the new standards and expect to have the data available for the participating employers to use in preparing their financial statements. Here are several key implementation considerations:

Discount Rate – The discount rate should be the single value that reflects the following:

  • The long-term expected rate of return on pension plan investments that are expected to finance the payment of benefits to the extent that (a) the pension plan’s fiduciary net position is projected to make projected benefit payments (GASB’s example projects out one hundred years) and (b) pension plan assets are expected to be invested using a strategy to achieve that return, and;  
  • A yield or index rate for twenty-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher (or equivalent quality on another rating scale), to the extent that the conditions are not met.

Actuarial Cost Method – The entry age normal cost method is required for financial reporting. The pension plan may use a different actuarial cost method for funding purposes.

Timing and Frequency of Valuations – Actuarial studies are required every two years.

Measurement Date – A liability should be recognized for the employer’s proportionate share of the collective net pension liability, measured as of a date (measurement date) no earlier than the end of the employer’s prior fiscal year, consistently applied from year to year.

Proportionate Share – Cost-sharing employers will recognize their proportionate share of the net pension liability. This allocation should measure the proportionate relationship of the employer to all employers, and the basis for the allocation should be consistent with the manner in which contributions to the pension plan are determined.

Audit of the Proportionate Share – Consideration will need to be made as to who is responsible for determining the accuracy of the net pension liability and the allocation of the proportionate share.

Notes to Financial Statements and Required Supplementary Information (RSI) – There are numerous changes to the note disclosures, and ten years of information will be required to be disclosed in the RSI.

Cost to Implement – There will likely be additional costs resulting from actuarial and audit services related to the implementation of the new standards. Who pays for these additional costs between the plan and the employer will need to be addressed.

The following table briefly addresses the WRS, IMRF, and TRS responses and/or plans of implementation of the key matters noted above. This was derived from information distributed and/or presented by WRS, IMRF or TRS personnel. This information is subject to change.  

Implementation matterWRSIMRFTRS
Type of pension planCost-sharing multiple employerAgent multiple-employerCost-sharing multiple employer
Discount rateExpects to be able to use the long-term expected rate of return on pension plan investmentsA new blended interest rate assumption will be based on a long-term expected rate of
return on pension plan investments and a tax-exempt, high quality municipal bond rate
A new blended interest rate assumption will be based on a long-term expected rate of
return on pension plan investments and a tax-exempt, high quality municipal bond rate
Actuarial cost method - financial reportingEntry age normal actuarial cost methodEntry age normal actuarial cost methodEntry age normal actuarial cost method
Actuarial cost method - funding purposesA variant of entry ageA variant of entry ageCurrently uses projected unit credit cost method
Timing and frequency of valuationsAn annual actuarial valuation is performed as of December 31 each yearAn annual actuarial valuation is performed as of December 31 each yearAn annual actuarial valuation is performed as of June 30 each year
Measurement dateThe net pension liability and related disclosure information will be provided using a measurement date of December 31st each yearThe net pension liability and related disclosure information will be provided using a measurement date of December 31st each yearThe net pension liability and related disclosure information will be provided using a measurement date of June 30th each year
Proportionate shareThe net pension liability will be allocated to all employers based on their proportionate share of employer contributionsNot applicable as the net pension liability will be calculated for each employer individuallyTRS plans to use employer's share of active member payroll to allocate the employer share of the net pension liability among employers
Audit of the Net Pension LiabilityThe collective net pension liability and the basis for allocation will be audited by the WRS auditor prior to distribution to the employersThe net pension liability for each employer will be audited by the IMRF auditor prior to distribution to the employersThe collective net pension liability and the basis for allocation will be audited by the TRS auditor prior to distribution to the employers
Notes to financial statements and required supplementary informationSuggested language and appropriate data will be provided to the employers to comply with the disclosure requirementsSuggested language and appropriate data will be provided to the employers to comply with the disclosure requirementsIt is expected that suggested language and appropriate data will be provided to the employers to comply with the disclosure requirements
Cost to implementThe data needed to comply with the GASB 68 reporting requirements will be provided and paid for by the WRS trust fund. There will be no special assessment to employers for this service.The data needed to comply with the GASB 68 reporting requirements will be provided and paid for by the IMRF trust fund. There will be no special assessment to employers for this service.The data needed to comply with the GASB 68 reporting requirements will be provided and paid for by the TRS trust fund. It is not known if there will be a special assessment to employers for this service.

Please note that the information provided above focuses on the WRS, IMRF, and TRS plans. However, many local governments, particularly in Illinois, have individual pension plans for some of their employees (e.g., police and firefighters’ pension plans). In the case of single-employer plans, the individual government sponsoring the pension plan will be responsible for the plan’s implementation of GASB No. 67 and providing the information outlined above to the employer so that they can properly implement GASB No. 68. A whitepaper has been drafted by the Technical Accounting Review Committee of the Illinois Government Finance Officers Association (IGFOA). This paper will help serve as an implementation guide for those local governments that have stand-alone pension plans and will be available on the IGFOA website in late February. In the meantime, it is recommended that entities with single-employer plans begin preparations by contacting their actuary to determine the best course of action for the implementation of GASB No. 67 and GASB No. 68.

For more information on this topic, or to learn how Baker Tilly state and local government specialists can help, contact our team.

Details on Minnesota pension plans, including Public Employees’ Retirement Association and Teachers’ Retirement Association, will be available in our next issue.