GASB Statement No.
No 68
New Pension Standard
June 2013
J h E
John
E. Bartel
B t l
GASB 27
Wh t Was
What
W It?
 Recognize
Recogni e Net Pension Obligation (NPO) if Plan
Sponsor did not contribute Annual Required
Contribution (ARC)
 Pension Expense based on ARC, determined NPO
 Net Pension Obligation if Contribution < Pension
p
Expense
6/12/13
2
GASB 27
Wh t Was
What
W It?
 Used as contribution
contrib tion out
o t of bounds
bo nds marker:
 30 year amortization
 Pension Expense drives Obligation on Financial
Statement
6/12/13
3
GASB 68
Wh t IIs It?
What
 Changes GASB 27
 Exposure Draft issued June 2011
 Final Standards Approved June 25th 2012
 Accounting only, NOT Contributions
6/12/13
4
GASB 68
Wh t IIs It?
What
 Recognize Net Pension Liability (asset) regardless
of contributions
 Net Pension Liability drives Pension Expense
 Additional note disclosures and RSI
 Systems and plan sponsors will need to look
elsewhere for contribution out of bounds markers
 Actuaries?
 Plan Sponsors?
 GFOA?
 Common sense?
 Legislature?
 Some combination!
6/12/13
5
California Actuarial Advisory Panel
F di Policies
Funding
P li i and
d Practices
P ti
 General F
Funding
nding Policy
Polic Objectives:
Objecti es:
1. Future contributions and assets should fund benefits
2. Should reasonably allocate cost to service
3. Manage and control contribution volatility
4. Support general public policy goals of accountability
and transparency
5. Consider nature of public sector pension plans and
their governance
6/12/13
6
California Actuarial Advisory Panel
F di Policies
Funding
P li i and
d Practices
P ti
 Components:
 Cost (allocation) method
 Asset smoothing method(s)
 Amortization policy:
 Period
 Payment increases
6/12/13
7
GASB 68
Wh D
Who
Does It A
Apply
l T
To?
?
 Employers
Emplo ers with
ith DB &/or DC pension plans
administered through trusts in which assets are:
 Irrevocable
 Dedicated and used only to provide pensions to plan
members
 Protected from creditors
 Agencies participating in CalPERS & other
California retirement systems/plans
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8
GASB 68
Eff ti Date
Effective
D t
 Fiscal years
ears beginning after JJune
ne 15
15, 2014
 Generally FYE 2015
 Earlier adoption encouraged
6/12/13
9
GASB 68
Th
Three
C
Categories
t
i off Pl
Plans
 Single Employer
Emplo er pension plan
 Benefits only employees of one employer
 Agent multiple-employer pension plan
 Assets pooled for investment purposes
 Separate accounts maintained for each employer
 Each employer’s share of pooled assets is legally
available only to pay pensions of its employees
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10
T
Types
off Plans
Pl
(continued)
( ti
d)
 Cost-sharing
Cost sharing m
multiple-employer
ltiple emplo er pension plan
 Both assets and obligations to provide pensions are
shared
h d (pooled)
(
l d) by
b all
ll employers
l
 Plan assets can be used to pay employee pensions of
any plan
l employer
l
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11
T t l Pension
Total
P i Liability
Li bilit
 Measure of benefits deemed earned to date (“past
service”)
i ”)
 aka Actuarial Accrued Liability
 “Entry Age Normal” level percent of pay cost
method
 Based on:
 Benefit terms plus any legal agreements in force
 Anticipated ad hoc COLAs and other changes to the
extent considered substantively automatic
 Significant
g
changes
g between actuarial valuation date
and measurement date
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12
Assumptions
 Generally based on Actuarial Standards of Practice
 Discount
Di
t rate
t – single
i l equivalent
i l t rate
t based
b d on:
 Long term rate of return on plan investments
 Net
N t off investment
i
t
t but
b t nott administrative
d i i t ti expenses
 To the extent:
 Projected plan assets expected to be available to pay benefits
and
 Plan assets expected to be invested using long term strategy
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13
Assumptions
 Discount rate (continued):
 20-year
20
hi h quality
high
lit (AA/Aa
(AA/A or higher)
hi h ) tax
t exemptt
municipal bond rate:
 To the extent:
 benefit payments without (available projected) plan assets
or
 plan assets not expected to be invested using long term
strategy
 Currently ≈3%
3%
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14
Sample
p CalPERS Safety
y Plan
(Aa 20 Year Municipal Bond Rate = 3%)
 Before CalPERS April Board Changes
 15 Year Rolling Asset Smoothing
 30 Year Rolling Amortization of Gains/Losses
6/12/13
15
Sample
p CalPERS Safety
y Plan
(Aa 20 Year Municipal Bond Rate = 3%)
500,000
Insufficient Assets
450,000
Trust Benefit Payments
400,000
AAL at 7.5% DR
350 000
350,000
MVA
300,000
250,000
6 1%
6.1%
200,000
150,000
100 000
100,000
50,000
6/30/11
6/12/13
6/30/21
6/30/31
6/30/41
6/30/51
16
6/30/61
6/30/71
6/30/81
6/30/91
Sample
p CalPERS Safety
y Plan
(Aa 20 Year Municipal Bond Rate = 3%)
 After CalPERS April Board Meeting
 Current Bases converted to Fixed Periods
 5 Year Direct Rate Smoothing
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17
Sample
p CalPERS Safety
y Plan
(Aa 20 Year Municipal Bond Rate = 3%)
500,000
Insufficient Assets
450,000
Trust Benefit Payments
400,000
AAL at 7.5% DR
350 000
350,000
MVA
300,000
250,000
7 5%
7.5%
200,000
150,000
100 000
100,000
50,000
6/30/11
6/12/13
6/30/21
6/30/31
6/30/41
6/30/51
18
6/30/61
6/30/71
6/30/81
6/30/91
T t l Pension
Total
P i Liability
Li bilit
 GASB 68 M
Measurementt D
Date:
t
 Within 12 months of employer fiscal year end
 OK to roll forward from a prior date within 30 months
of employer fiscal year end
 For example:
Employer Fiscal
Year End
Earliest
Measurement Date
Earliest
Valuation Date
6/30/15
6/30/143
12/31/12
12/31/15
12/31/14
6/30/13
 Preference
P f
iis ffor M
Measurementt D
Date
t = FYE
6/12/13
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Fid i
Fiduciary
N
Nett P
Position
iti - Assets
A t
 At measurement
meas rement date
 Dedicated to provide pension benefits
 Fair market value, no smoothing
6/12/13
20
Single and Agent Employers
R
Recognize
i Net
N tP
Pension
i Liability/Asset
Li bilit /A t
 In financial statement
 Equal to:
 Total Pension Liability
net of
 Fiduciary Net Position
6/12/13
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P i Expense
Pension
E
 Change in Total Pension Liability
Liabilit (AAL)
minus
 Change in Fiduciary Net Position (MVA)
less
 Deferred Outflows and Inflows for the period
plus
 Portion of deferrals recognized in current period
6/12/13
22
D f
Deferred
dO
Outflows
tfl
and
d IInflows
fl
 Deferred o
outflows
tflo s and inflows
inflo s of resources
reso rces
related to pensions
 Cumulative changes in Net Pension Liability
which have not yet been recognized in pension
expense
 Unamortized portions of gains & losses and
assumption changes.
 Contributions made after the Measurement Date
6/12/13
23
Change in Total Pension Liability
I
Immediate
di t R
Recognition
iti
 Service Cost based on same method and
assumptions as noted above
 Interest
I
using
i blended
bl d d single
i l discount
di
rate
 Benefit changes
 Other changes
 Data adjustments/corrections
 Plan administration costs if paid from plan assets
6/12/13
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Change in Total Pension Liability
D f
Deferred
dR
Recognition
iti
 Active & inactive gains/losses
 Assumption changes
 Recognized over closed period based on average of
active and inactive remaining future service
 Likely
Lik l ≈5-8
≈5 8 years
 Shorter for plans with high ratio of retirees and
 Longer
L
e for
f plans
l
with
ith high
hi h ratio
ti off actives
ti e
 May be level $ or level % of pay
6/12/13
25
Ch
Change
in
i Fiduciary
Fid i
Net
N tP
Position
iti
 Immediate recognition for
 Expected investment earnings
 Contributions, benefit payments
 Deferred recognition for
 Investment gains/losses on MVA
 Over five year closed period
6/12/13
26
C Sh
Cost
Sharing
i M
Multiple-Employer
li l E l
P
Pensions
i
 For example,
example CalPERS Risk Pools
 Plan or Risk Pool’s net pension liability
calculated
l l t d same as for
f single
i l andd agentt employers
l
 Agency reports & recognizes proportionate share
of Plan’s or Risk Pool’s net pension liability
 Any
y reasonable method to determine proportion
p p
 Should be consistent with contribution determination
6/12/13
27
Cost Sharing Multiple-Employer Pensions
D f
Deferred
dR
Recognition
ii
 Closed period based on
 Average remaining future service of Plan’s active &
inactive employees
p y
 Gains/losses & assumption changes
 Effect
Eff t off change
h
in
i employer’s
l
’ proportion
ti
 Effect of differences between
 Actual contribution and
 Expected proportionate share of contributions
6/12/13
28
GASB 68 - Other
Oth IIssues
 Special funding situations
 Apply to entities other than employer that are legally
required
q
to contribute to the employer’s
p y
plan
p
 Pension plans not funded through qualified trusts:
 Will be addressed later and
 Should continue to apply Statement Nos. 27/50
6/12/13
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GASB 68 - Other
Oth IIssues
 Defined Contribution Pensions,
Pensions Recognize:
 Expense for contributions for period as defined by
plan’ss terms
plan
 Cash expenditures for amounts contributed
 Liability
Liabilit for difference
 OPEB:
 Will be addressed later and
 Continue to apply
pp y Statement No. 45
6/12/13
30
C lPERS U
CalPERS
Upcoming
i IIssues
6/12/13
31
Wh t IIs C
What
CalPERS
lPERS L
Looking
ki At?
 Contribution
C t ib ti Policy
P li
 Demographic
g p Assumptions
p
 Discount Rate
6/12/13
32
Wh Change
Why
Ch
C t ib ti P
Contribution
Policy?
li ?
 GASB 68 encourages faster
f t funding
f di by
b
requiring a lower discount rate for slower
f di
funding
 Asset corridor g
generates volatilityy when
extreme events happen
 Slow
Sl progress towards
t
d increased
i
d funded
f d d status
t t
 Current method needs improved
p
transparency
p
y
6/12/13
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What Changes Did CalPERS Make in
C t ib ti P
Contribution
Policy?
li ?
 No
N assett corridor
id in
i conjunction
j ti with
ith shorter
h t
smoothing period and fixed (shorter)
amortization
ti ti periods
i d
 Direct rate smoothing
g based on:
 5 year ramp up
 No asset smoothing (target based on Market Value)
 25 year amortization period
 No cap on rate increases each year
6/12/13
34
Ti i F
Timing
For F
Funding
di Policy
P li Changes?
Ch
?
 Approved
A
d bby C
CalPERS
lPERS B
Board
d iin A
April
il
 Included in 6/30/13 valuation ((15/16 rates))
 Estimated impact included in 6/30/12
valuation
l ti
6/12/13
35
Oth Ch
Other
Changes?
?
 Assumption
A
ti study:
t d
 Will likely recommend generational mortality
impro ement
improvement
 Asset allocation study:
 Likely recommend a .25% margin
 Likely
y also recommend .25% reduction in real rate
of return
 need to wait for asset allocation study
6/12/13
36
Oth Ch
Other
Changes?
?
 Timing:
Ti i
 Default will be to include demographic & discount
rate in 6/30/13 valuation (15/16 rates)
 CalPERS Board may
y delay
y until 6/30/14 valuation
6/12/13
37
Safety Plan
C t ib ti Projection
Contribution
P j ti Assumptions
A
ti
Market Value Investment Return
 June 30, 2012
0.1%
 June
J
30
30, 2013
13 9%
13.9%
 June 30, 2013 - 2017
 Poor Investment Return:
≈ 0.2% - 3.4%
 Expected Investment Ret:
≈ 77.50%
50%
 Good Investment Return:
≈ 11.6% - 15.1%
6/12/13
38
C t ib ti P
Contribution
Projection
j ti Assumptions
A
ti
 No Other: Gains/Losses,
Gains/Losses Method/Assumption
Method/Ass mption
Changes, Benefit Improvements
 Excludes
l d Employer
l
Paid
id Member
b Contributions
ib i
(EPMC)
 New hire assumptions:
 50% of 2013 new hires will be Classic Members
(Lateral) & 50% will be New Members.
 Classic Member will decrease from 50% to 0% of new
hires over 10 years
years.
6/12/13
39
Current Contribution Policy
Projections Incl
de PEPRA Impact
Include
6/12/13
40
New Contribution Policy
6/12/13
41
New Contribution Policy
With M
t & ¼% Di
t
Mort.
Discountt R
Rate
6/12/13
42
Comparative Rates
70%
65%
60%
58.7%
55.9%
55%
53.2%
50.7%
50%
47.7%
45%
45.6%
46.5%
47.4%
42.6%
43.8%
42.4%
42.4%
41.9%
41.7%
41.4%
14/15
15/16
16/17
17/18
18/19
19/20
40.7%
40%
35%
44 9%
44.9%
36.3%
30%
12/13
13/14
After PEPRA
Direct Rate Smoothing
6/12/13
43
6/12/13
44
Direct Rate Smoothing + Assumptions