Defined Benefit Plans
The total amount owed to employees in the future for a defined benefit plan is called the total pension liability. This is the money that would be needed to pay all employees what they are owed during retirement. The amount a municipality must pay to a defined benefit plan to meet this liability is found by calculating the present value of the future benefits.
The pension plan’s net assets are called the plan net position.
When the total pension liability exceeds the plan net position, there is a net pension liability. The GASB requires that the net pension liability be reported in the financial statements as a liability, even though the money does not have to be paid to the employee until retirement.
The following can be used to calculate the net pension liability:
total pension liability – plan net position = net pension liability
The net pension liability is discussed in the RSI in terms of how it is changing. Is it growing? Or has it shrunk in the past few years? This information helps to give a sense of the municipality’s financial standing.
Example: Goodville has a net pension liability that has decreased from $45 million to $30 million over the past ten years. Snowy Falls has a net pension liability that has increased from $25 million to $35 million over the past ten years. These numbers give us a sense of the financial health of these two towns. Goodville most likely has a growing economy, while Snowy Falls might be in an economic decline.
If the employer is part of a cost-sharing multiple-employer pension plan and the plan has a net pension liability, then the employer is only responsible for a proportional share of the liability. In other words, it does not have to include the entire liability on its financial statem