FASB attributable benefits

[FAPInJax]

A formula is a frozen benefit plus 1% of hi 5 compensation based on future years from the date of the freeze. The plan also ratios the average compensation to the frozen average.

The following facts can be used to illustrate the issue and assumes the freeze just occurred:

Frozen benefit = 1,000

Frozen compensation = 10,000

Projected compensation at NRD = 15,000

Projected pension at NRD = 2,500

The question is how to treat the frozen benefit for purposes of FASB. I believe that since it was a benefit earned in a prior period that any compensation increases would just create gain/losses.

Service cost would equal 2,500 minus 1,000 * (15,000 / 10,000). This 1,000 would then be spread over the years.

Likewise the PBO would be 1,000 * (15,000 / 10,000) = 1,500.

Any disagreements??

Thanks for any and all comments.

[Effen]

First, unless I misunderstood the question, I'm not sure your numbers work. How many YOS after the freeze?

1000 * 15,000/10,000 = 1500 is "frozen" piece

1% * 15,000 * X = 1000 is the future piece? (X= 6.6666?)

Anyway, I think I understand your question and I don't think I agree with your answer. Gains and losses are changes in the PBO resulting from experience different from that assumed. So, assuming you have an assumption for salary increases, I don't think that meeting that assumption can generate a loss.

Although it may not seem reasonable, I think under a strict reading FASB would require you to project the total benefit, then prorate based on total years to get the NPPC and PBO. The ABO could be done the same way, without the salary assumption. (Read FASB 87 paragraph 29, 40,41,42 & footnote 8)

It would seem reasonable to me to base the ABO on the actual Accrued Benefit and the PBO on the "project/prorate" method. However, that would seem to contradict the "rule" that the difference between ABO and PBO is salary scale.

You also might want to call FASB as ask their opinion. I would be interested in their response.

P.S. we miss MGB on this stuff.

[FAPInJax]

Thanks for the response!

I was looking specifically at the examples (Q:45-46) which have a 1% per year formula and limits the attribution to the maximum number of years permitted under the formula. Q-46 then goes on to state that although the attribution is similar that gain/loss will occur after the 20 year period if experience is different than assumed.

I will try giving them a call and asking for clarification.

[Guest flogger]

You've got to stick with the concept that the difference between the ABO and the PBO is strickly salary scale. It also seems to me that FAS87 refers to attribution, meaning that the service cost for the year is the pv of the benefit accruing in the year--not necessarilly ratable over the remaining working lifetime of a participant, especially with a unit credit formula that may limit credited service to a few years.

As for the "frozen" piece, the ABO of that piece is the PVAB based on current comp, and the PBO is the PVAB based on projected comp. As your compensation differs (actual vs expected) actuarial gains/losses are created and amortized accordingly.

[Guest Ron Sevcik]

I agree with flogger that the only difference between ABO and PBO is the salary scale. In Frank's example, you would not project and prorate the entire benefit unless that is the way the accrued benefit is defined in the plan. Based on Frank's initial post I assume it is not defined that way. FASB 87 paragraphs 16 and 17 support this position. I would even argue that paragraph 40 and footnote 8 that Effen referred to support Frank's example. All of these references state that the plan's benefit formula defines the attribution of the benefit to PBO and service cost.

In addition, many years ago (1984) the firm I worked for at that time sent a letter to the IRS requesting guidance on the operation of the projected unit credit method. We gave them several examples of different situations with different benefit formulas. In a nutshell, their response was that the accrued benefit under the projected unit credit method was calculated exactly the same as the accrued benefit under the plan except for the projection of the salary. The normal cost was then the difference between the benefit at the beginning of the year and the end of the year.

[Effen]

I deleted my posts because, I'm typing faster than I'm thinking. I'm working on one now with a "frozen" piece so I will slow down and think it through.

Sorry for the confusion. Getting back to the original question:

The question is how to treat the frozen benefit for purposes of FASB. I believe that since it was a benefit earned in a prior period that any compensation increases would just create gain/losses.

No, assuming you have a salary scale assumption, it should not generate losses, if salary assumption is exactly realized, g/l s/b 0.

I agree SC s/b 0

ABO<PBO, difference being due to salary assumption.

Sorry again for any confusion.

[FAPInJax]

Well, you guys will love this!!!

FASB just returned my call and explained that this type of formula, in their opinion, is handled under FASB 88 (curtailment rules).

I think I will attempt to come up with some actual numbers and present it to them again. They really had trouble understanding why a plan would ratio a prior benefit.

[david rigby]

FAS88! No way. Did they explain why?

[could be me maybe not]

What do they know about the proper application of FAS#87 to DB plans, anyways; they're just accountants.

[FAPInJax]

The explanation was that a frozen plus future is generally treated under FASB 88. I was offered the opportunity to read that statement and IF additional questions arise to enter an additional technical request. I am attempting to put together a numerical response that hopefully will clarify the situation.

I believe that their thought was that the 'ultimate' benefit was being reduced (thereby a curtailment).

[david rigby]

... the 'ultimate' benefit was being reduced (thereby a curtailment).

So what? There may have been a curtailment at the time of the freeze (not necessarily), but that does not appear to be relevant to your initial question.