Last year the National Association of Insurance Commissioners (NAIC) adopted two new accounting standards designed to incorporate many of the changes to pension accounting processes outlined in Financial Accounting Standard (FAS) 158, Employers’ Accounting for Defined Benefit Pension Plans, into Statutory Accounting Principles. The two new standards SSAP 92, Accounting for Postretirement Benefits Other than Pensions, and SSAP 102, Accounting for Pensions, provide specific guidance on how insurance companies are to recognize and report components of retirement plan costs. While the new standards have been in effect for some time, we have found that additional clarity about the standards, their intent and impact on pension accounting is needed. To help clients, prospects and others understand these changes; JLK Rosenberger has provided a summary of significant changes below.
Key Pension Accounting Changes
- New Calculation Method – SSAP 92 requires the implementation of a new liability calculation formula called the Pension Benefit Obligation (PBO). Previously, the liability due to employees was calculated using the Accumulated Benefit Obligation (ABO). The ABO is an estimate of the present value of an employee’s pension assuming the employee ceases work on the estimate date. In an effort to arrive at a more true estimate of plan liabilities, the PBO calculates plan liabilities based in part on the increases in compensation levels of active participants. It is an estimate of the present value of an employee’s pension assuming the employee will continue to work into the future. Using this new information, plan sponsors are then required to recognize the funded status which is the difference between the PBO and plan asset levels on the balance sheet. For example, if there are not enough plan assets to cover the PBO, then the funded status should be reported as a liability. If the reverse is true, then the funded status should be reported as a non-admitted asset.
- Recognition of Unvested Benefit Liabilities – Another important change ushered in by the new standards is how benefits for unvested plan participants are recognized in the financial statements. Under prior standards, when calculating the service cost, benefits expected to be paid to unvested participants were not included in the calculation. This occurred in part because it was reasonable to expect that not every unvested participant would become vested. However, the new standard requires unvested benefit liabilities to be included when calculating the service cost recognized in the financial statements.
- Surplus Recognition – According to the new standards, companies have the option to defer recognition of the liability for a plan’s funded status arising upon transition to the new standards. It may be recognized as a charge to surplus when the new standard is adopted or it may be deferred and amortized over a period not to exceed 10 years. However, if a company chooses to amortize, then it must initially recognize a minimum liability equal to the excess of the ABO over plan assets. It’s important to note that if this election is selected there are several additional disclosure requirements that must be made in both quarterly and annual financial statements until the transition liability is completely recognized in the financial statements. Also, the NAIC issued an interpretation, INT 13-03: Clarification of Surplus Deferral in SSAP No. 92 & SSAP No. 102 indicating that if a surplus benefit is produced upon transition, as a result of deferral, it is not to be recognized.
The new reporting requirements implemented in SSAP 92 and SSAP 102 are complex and represent a significant change to annual reporting procedures. Looking for assistance implementing these new guidelines?