FAS Amortization period change?

[AndyH]

For an active plan, we all know that gains and losses in excess of the 10% corridor (if chosen) are amortized over the average future service of active participants expected to receive benefits.

For a plan covering all or substantially all inactives, life expectancy is used.

What about a (recently) hard frozen plan covering 15% active employees with frozen benefits and 85% Vts and retirees, where the actives have been told they will get no future benefit or compensation credit.? Are they active or inactive?

I googled this issue and found a couple of conference sessions that raised this question without an apparent (or at least written) answer. I also know that at least one actuary from a major firm changes the amortization period at the time of a hard freeze from average future service to life expectancy, and at least one accounting firm published a newsletter in support of such a change.

Would anyone comment on their view of this issue, whether hard frozen actives are inactives for purposes of the FAS amortization period?

[Andy the Actuary]

For an active plan, we all know that gains and losses in excess of the 10% corridor (if chosen) are amortized over the average future service of active participants expected to receive benefits.

For a plan covering all or substantially all inactives, life expectancy is used.

What about a (recently) hard frozen plan covering 15% active employees with frozen benefits and 85% Vts and retirees, where the actives have been told they will get no future benefit or compensation credit.? Are they active or inactive?

I googled this issue and found a couple of conference sessions that raised this question without an apparent (or at least written) answer. I also know that at least one actuary from a major firm changes the amortization period at the time of a hard freeze from average future service to life expectancy, and at least one accounting firm published a newsletter in support of such a change.

Would anyone comment on their view of this issue, whether hard frozen actives are inactives for purposes of the FAS amortization period?

First, we are talking about minimum amortization. Generally, the issue of what is appropriate is in the hands of the client and auditors. You will not find the word "actuary" if you search a pdf of FASB87. Now, to answer your question, I've always counted frozen actives as actives since they still have a future working lifetime. While it does not justify the correctness of this practice, no auditor has ever commented negatively.

[AndyH]

Agree with all your points, but still want opinions. Projections done by prior actuary using life expectancy, which has a huge effect on NPBC and P&L. What is common practice?

[SoCalActuary]

Recently hard frozen - sounds like a curtailment.

I would recommend full cost accrual currently. Some large firms like ATT have done so.

One alternative is to continue the current accouting practice of the prior actuary.

Second alternative is to pick some fixed period as a specified accounting method.

The full liability already exists, so you will have waves of asset gains(hopefully) and losses, and you will have some liability G/L.

How often will this exceed the 10% corridor? I am asking how relevant the issue becomes. Are the assets of this frozen group invested in volatile equities?

[AndyH]

Unrecognized losses are large, will exceed 10% corridor for years under future service amortization.

To be clear, the prior actuary used the future service amortization period (call it 10 years), but plan frozen 12/31/2010 and 2011 projection by the prior actuary used the life expectancy period (call it 30 years). Client expected NPBC based upon a 30 year amortization instead of a 10 starting in 2011. So this would not be a continuation of prior practice, it would be a change. But it was the basis for a projection.

Yes, it was a curtailment; that part already handled.

It appears to us that this change may be defendable, but possibly unusual practice. Trying to see whether others feel that such a change is consistent with the FASB ASC 15 rules (subject to sponsor's decision and auditors OK of course); it cuts current NPBC (therefore P&L) substantially.

[SoCalActuary]

My preference is that you show no NPBC, with the entire unfunded liability as a balance sheet item. But that is not how the system is set up.

Negotiate this with the plan sponsor and their accountant. How soon do they expect to cover the underfunding? 7 years per PPA? Then match the FAS amortization period as a specific change in accounting method.