Pension Plan Accounting
The total amount owed to employees in the future for a defined benefit plan is called the total pension liability (TPL). This is the money that would be needed to pay all employees what they are owed during retirement. Specifically, it is the value of the projected benefits accrued of current and former employees with COLAs. 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 TPL discount rate is a combination of the expected investment return rate and a tax-exempt municipal GO bond yield. The expected investment return rate is used for liabilities that can be paid with plan assets. Remaining liabilities are discounted at a high quality municipal rate. The point at which projected benefits exceed plan assets is called the crossover point. Thus, benefits beyond the crossover point will be discounted at the municipal rate.
The pension plan’s net assets are called the plan net position or fiduciary net position (FNP). The FNP is the fair market value of the assets available to pay benefits. It is similar to the AVA but uses the fair market value rather than a smoothed value.
When the total pension liability exceeds the plan net position, there is a net pension liability (NPL). This is essentially the amount of unfunded benefits. 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 h