Blue Ridge ESOP Associates
(Charlottesville VA / Telecommute)
Retirement Plan Consultant
Cetera Retirement Plan Specialists
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Projecting Your Own
FAS 87 valuations are only required every three years. We have always recommended and still do that valuations are like medical checkups and should be done every year or more frequently when there are major changes occurring.
But, what happens when you have not had any major changes and your available resources (budget, time, etc.) will not permit a full valuation? Often, the client will return to the actuary responsible for the last report and ask him to "update" it. They often find this approach is still pretty expensive! In reality, you can do your own update. Once accomplished, you have at least two choices; ask you actuary to review (not redo) the work or persuade your auditor that you did it correctly.
The latter is not so difficult if there is no requirement for any changes in actuarial assumptions, especially the discount rate.
The base projection is always done on a "no new gain or loss" basis; that is, all actuarial assumptions are assumed to be exactly met during the year. By base, we mean this must be done first. Our standard report includes a one-year projection for budget purposes which can be used for this first step.
The mathematics goes like this;The net unamortized net gain and loss (including all unamortized components) for the current year equals the difference between the Projected Benefit Obligation (PBO) on the one side and the sum of the external Assets(A) and the Accrued Pension Cost (APC) on the other.UNG0=PBO0-(A0+APC0)Next year's unamortized net gain and loss is similarly defined:UNG1=PBO1-(A1+APC1)
In this projection, we require no new net gain or loss, meaning that the only change in the UNG is the sum of any amortization payments included in the Net Periodic Pension Cost (NPPC). Now we know that the NPPC equals the sum of the Service Cost (SC), Interest Cost (IC), net Amortization Payments (AP) less the Expected Return (ER):NPPC0=(SC0+IC0+AP0)-ER0
We will deal with the Actual Return (AR) a little later.
As stated, UNG1= UNG0-AP0, since we are requiring all actuarial assumptions to be exactly realized. The new unrecognized net gain & loss equals the old minus the amortization payment.
Making some substitutions, we getUNG1=PBO0-(A0+APC0)-AP0=(PBO0+SC0+IC0)-(A0+ER0+APC0+NPPC0)
Note that neither benefits nor premiums (contributions) show up in this formula; there are a variety of manipulations available that will not disturb the balance. One, available at the end of the year, is to introduce Actual Benefits (AB) and permit AB to be divided into two pieces - that paid by the external assets (EAB) and that paid by the company directly under the terms of the plan (IAB). The formula becomesUNG1=(PBO0+SC0+IC0-AB0)-([A0+ER0-EAB0]+[APC0+NPPC0 -IAB0])
The formula only needs one more piece - actual premiums(C) - to produce reasonable estimates of PBO1, A1 and APC1...UNG1=(PBO0+SC0+IC0-AB0)-([A0+ER0+C0-EAB0]+[APC0+NPPC0 -C0-IAB0 ])
In fact, APC1 exactly equals APC0+NPPC0 -C0-IAB0 ; the year-end accrued pension cost equals the beginning plus the charge less the payments. "Expected" PBO1 equals PBO0+SC0+IC0-AB0 and "Expected" A1 equals A0+C0+ER0-EAB0. In the absence of additional information, these new numbers are acceptable for year-end disclosure.
Usually, however, actual assets are known and Actual Return (AR) is available. The difference between ER and AR is a gain and the formula for assets adjusts to A0+C0+AR0-EAB0 with the difference being an adjustment to gain & loss. Your balance sheet will then showAPC1=APC0+NPPC0-C0 -IAB0
and the footnotes will disclosePBO1=PBO0+SC0+IC0-AB0
UNG1 will also be split into its components in the footnotes, following the amortization schedules already set out and the adjustment for actual return.
These are all numbers you can calculate yourself in the absence of changes in the actuarial assumptions for the new year and any major events during the year.
You have been reading the online edition of LIA $FACTS$, the monthly fax newsletter of Lohmann International Associates. For further information, please visit our home page on the Web or send e-mail to Les Lohmann.