New pension accounting for insurance companies

Transcription

1 HRS Insight 2013, Vol. 25 New pension accounting for insurance companies November 25, 2013 In brief The National Association of Insurance Commissioners (NAIC) has changed employers accounting for pensions and other postretirement benefits. The new guidance applies the provisions of ASC 715, Compensation Retirement Benefits, to pension and other postretirement benefits accounting for insurance companies, with several exceptions. This Insight describes the new accounting guidance. In detail Background Insurance companies are regulated on a state-by-state basis in the United States. As discussed in the NAIC s Statutory Accounting Principles Preamble, each state has its own regulatory framework generally led by an insurance commissioner. Insurance commissioners are charged with overseeing the financial condition of insurance companies doing business in their jurisdictions and they require meaningful financial, statistical, and operating information about the companies. This financial oversight is designed to help ensure that policyholders and claimants receive the requisite benefits from the policies sold, oftentimes such products having been sold years or decades prior to when the benefits are due. Frequently, this regulatory perspective differs markedly from the perspectives of other users of insurers accounting information. In recognition of these special concerns and responsibilities, statutory have been established by statute and regulation. The objective of US GAAP reporting differs in certain respects from the objective of Statutory Accounting Principles (SAP). US GAAP is designed to meet the varying needs of the different users of financial statements. SAP is designed to address the concerns of regulators, who are the primary users of statutory financial statements. As a result, GAAP stresses the current financial performance and operating results of the entity, while SAP stresses measurement of the insurance company's ability to pay claims in the future. Insurance companies that report financial results under both US GAAP Accounting Standards Codification (ASC) and the NAIC Statements of Statutory Accounting Principles (SSAPs) need to ensure that differences in accounting and reporting for employee benefits are appropriately considered. While the NAIC's SSAPs are primarily based on existing US GAAP guidance, some significant differences exist. For employee benefits, some of the more recent accounting standards issued under US GAAP such as FAS 158 had not been adopted by the NAIC as part of the SSAPs. At its Spring 2012 National Meeting, the NAIC adopted Statement of Statutory Accounting Principles No. 102 (SSAP No. 102), Accounting

2 HRS Insight for Pensions, A Replacement of SSAP No.89 and Statement of Statutory Accounting Principles No. 92 (SSAP No. 92), Accounting for Postretirement Benefits Other Than Pensions, A Replacement of SSAP No. 14. The more significant changes from SSAP No. 89 and SSAP No. 14 include: Inclusion of obligations attributable to nonvested benefits in the determination of projected benefit obligation (PBO) and accumulated postretirement benefit obligation (APBO) and net periodic plan cost Requirement to use fair value of plan assets in determining net periodic pension plan costs Recognition of unfunded benefit obligations in the statement of financial position (surplus/nonadmitted assets) Recognition of unamortized transition assets or obligations, prior service costs and gains and losses in unassigned funds Measurement date as of fiscal year end. Observation For employers filing under US GAAP as well as SAP, the new guidance may simplify the process of determining employee benefit obligations and net periodic plan cost, since the new SAP requirements incorporate many of the provisions of ASC 715 that had previously not been included in the prior SSAPs. However, the requirement to recognize the unfunded benefit obligation, including obligations for nonvested plan participants, may prove onerous for many employers, especially employers who provide other postretirement benefits, since obligations for employees who are not yet eligible to retire are generally considered to be nonvested. SSAP No. 102 and SSAP No. 92 adopt the provisions of ASC 715 with the following exceptions: In determining the expected return on plan assets and the 10% corridor for gain/loss amortization, plan assets must be valued at fair value (i.e. a calculated value as permitted under US GAAP will not be permitted under SAP). All references to other comprehensive income (OCI) and accumulated OCI in US GAAP have been revised to reflect unassigned funds (surplus). Prepaid assets continue to be nonadmitted. In addition, the cost of a participation right of an annuity contract is also non-admitted. The reduced disclosure for nonpublic entities permitted under US GAAP is not permitted under SAP. Classification in US GAAP of unfunded obligations as current or noncurrent is eliminated. Fair value of assets will continue to be determined under statutory guidance rather than under US GAAP. Transition rules in applying the new standards differ from transition under US GAAP. The effective date for both standards is January 1, 2013, with the exception of the effective date of January 1, 2014 for the required change in measurement date. Early adoption is permitted; however, early adoption must be applied to all benefit plans of the insurance company. The transition rules including the following: Net periodic benefit cost will include amortization of unrecognized prior service cost existing prior to adoption for nonvested employees. Other unrecognized balances (gains and losses, prior service costs for vested and nonvested employees, and transition obligations or assets from initial application of SSAP 89 and SSAP 14) are recognized in unassigned funds as of December 31, 2012 (i.e. the date prior to the adoption date of January 1, 2013) unless the company elects to amortize the transition surplus (i.e. the alternative transition). The offset to unassigned funds is reported separately as an aggregate writein for other than invested assets or for other liabilities. The insurance company may either elect to recognize the entire amount of transition surplus (i.e. unrecognized balances described above) in the year of adoption or elect to amortize the transition surplus into income over a period of not more than ten years. Companies who elect the alternative transition must disclose the entire transition surplus. In transitioning to a fiscal yearend measurement date, companies will be required to remeasure obligations and plan assets at the beginning of the first year that the measurement date provisions are applied. The remeasured amounts are used to determine the effects of the change in measurement date. Alternative methods provided under FAS 158 are not permitted under SAP. 2 pwc

3 Determination of net periodic plan cost The determination of net periodic plan cost under SSAP No. 102 and SSAP No. 92 is similar to the determination of net periodic plan cost under ASC 715, with the exception of the following: Fair value of plan assets is used to determine the expected return component and the 10% corridor for gain/loss amortization. A calculated value, as permitted under ASC 715, is not permitted under SAP. At transition, a new prior service cost base equal to nonvested benefit obligations is established. Net periodic plan cost will include amortization of the new prior service cost over the vesting period of the nonvested plan participants. Existing transition, gain/loss and prior service cost bases will continue to be amortized; however, the amortization of gains and losses will include nonvested benefit obligations in the corridor and the future working lifetime of nonvested plan participants in the amortization period. Observation SSAP No. 92 has changed the amortization period for gains and losses and prior service costs. Unless all or almost all the plan participants are fully eligible for benefits, SSAP No. 92 requires amortization of prior service costs over the average remaining years of service to full eligibility of active plan participants not yet fully eligible. For gains and losses in excess of the corridor, the minimum amortization period is the average remaining service period of active plan participants. Previously, SSAP No. 14 defined the amortization periods for prior service costs and gains and losses as the average life expectancy of the plan's fully vested and retired plan participants. Transition For an insurance company adopting the SSAPs on January 1, 2013, a transition surplus impact is defined by the guidance as the unrecognized items as of December 31, 2012 (i.e. gains and losses, prior service costs, including prior service costs for nonvested plan participants, and transition assets or obligations from original application of SSAP No.89 and SSAP No. 14) which have not been included as a component of net periodic benefit costs. The unrecognized items shall be recognized in unassigned funds (surplus) as of January 1, 2013, unless the deferral option, described below, is elected. In lieu of immediately recognizing the entire surplus impact, companies may elect, on a plan-by-plan basis, to recognize the surplus impact over a period not to exceed ten years. The annual amount to be recognized is the greater of: 1. 10% of the transition surplus impact determined as of December 31, Amortization of the unrecognized items as of December 31, 2012, following the existing amortization schedules in effect on the transition date (reflecting accelerated amortization of these amounts due to subsequent settlements or curtailments) 3. For pension plans, unfunded ABO as of December 31, 2012, less any previously accrued amounts (any prepaid pension asset is not considered). Any gain or loss or prior service cost arising after the transition date is not subject to the deferral option, but must be immediately recognized in unassigned funds. In addition, if future gains or employer contributions to the plan result in a prepaid benefit cost or overfunded status of that plan, the recognition of the transition surplus impact shall be accelerated to the extent the plan is overfunded. If the plan experiences subsequent gains that will be recognized in earnings, an additional amount of the remaining transition liability must be recognized to offset the gain. The takeaway The new SSAPs may simplify the determination of obligations and net periodic benefit cost for many employers. However, the requirement to record the unfunded benefit obligations as a charge to surplus may prove onerous. While the transition rules may ease the financial burden of transitioning to the new requirements, the transition rules are complex and require analysis based on the attributes of each particular plan. You may consider consulting with your local PwC engagement team or the authors on specific implementation questions prior to year-end. The attached Appendix provides a comparison of the accounting for defined benefit pensions and other postretirement benefits under US GAAP, prior SAP and amended SAP. 3 pwc

4 Appendix Accounting for pensions and other postretirement benefits Guidance ASC 715, Compensation Retirement Benefits, provides guidance on the disclosure and other accounting and reporting requirements related to singlecompany defined benefit pension and other postretirement benefit plans under US GAAP. SSAP 89 - Accounting for Pensions, A Replacement of SSAP 8 and SSAP 14 - Postretirement Benefits Other Than Pensions established statutory accounting principles and related reporting for companies pension and other postretirement benefit plans. For defined benefit plans, SSAP 89 and SSAP 14 adopted the provisions of FAS 87, FAS 106 and FAS 132 (R), with certain modifications discussed below, but did not include the provisions of FAS 158. For defined benefit plans, SSAP 102 and SSAP 92 supersede the guidance in SSAP 89 and SSAP 14, respectively. The guidance incorporates the guidance from FAS 158 with certain modifications discussed below. Pension asset/ liability A company is required to recognize on its balance sheet the funded status of its defined benefit plans. The funded status is measured as the difference between the fair value of plan assets and the defined pension/other postretirement benefit obligation on a plan-by-plan basis. Accrued/prepaid pension or other postretirement plan cost (similar to FAS 87/FAS 106 prior to application of FAS 158): A liability (unfunded accrued plan cost) is recognized if the pension or other postretirement plan expense exceeds amounts the company has contributed to the plan. An asset (prepaid plan cost) is recognized if the pension or other postretirement plan expense is less than amounts the company has contributed to the plan (see discussion of non-admitted assets below). Same as US GAAP with modifications for non-admitted assets (see discussion of nonadmitted assets below). Transition options are included in the guidance. For defined benefit pension plans, an adjustment to reflect the additional minimum liability (AML) may be required (see discussion of AML below). Measurement date Fiscal year-end. Fiscal year end, or, if used consistently from year to year, as of a date not more than three months prior to fiscal year end. If the measurement date is prior to the Same as US GAAP. In transitioning to a fiscal year end measurement date, a company remeasures plan assets and 2 pwc

5 financial statement date and an additional minimum liability is required, any contribution to the plan to fund that additional minimum liability prior to the financial statement date may be used to reduce the additional minimum liability recognized in the financial statements. benefit obligations as of the beginning of the fiscal year that the new measurement date provisions are applied. A company uses those new measurements to determine the effects of the measurement date change as of the beginning of the fiscal year that the measurement date provisions are applied. Other approaches allowed under ASC 715 are not permitted under SSAP 102 and SSAP 92. Non-admitted assets N/A under US GAAP. The prepaid asset that results from an excess of the fair value of plan assets over the pension or postretirement benefit obligation is recorded as a non-admitted asset. Any intangible asset offsetting the minimum pension liability (excluding the unamortized transition obligation) is nonadmitted and charged to surplus (see Intangible Assets section below). Any prepaid asset resulting from the excess of the fair value of plan assets over the PBO is recorded as a non-admitted asset. In addition, the cost of a participation right of an annuity contract is recorded as a non-admitted asset. Additional minimum liability (AML) FAS 158 eliminated the AML concept included in FAS 87. For defined benefit pension plans, if the accumulated benefit obligation (ABO) exceeds the fair value of plan assets, the company shall recognize a liability (including unfunded accrued pension cost) that is at least equal to the unfunded ABO. SSAP 102 eliminated the AML concept included in SSAP 89. Intangible asset (offset to AML) N/A Under SSAP 89, if an AML is recognized, an equal amount is recognized as an intangible asset; however, the intangible cannot exceed unamortized prior service costs (including any unamortized transition obligation). Only the portion of the intangible asset in excess of the unamortized transition obligation is nonadmitted. N/A 3 pwc

6 If an intangible asset generated by the AML is recognized, only that portion in excess of the unamortized incremental liability associated with the transition obligation shall be non-admitted. If an additional liability required to be recognized exceeds unrecognized PSC, the excess shall be reported as a component of unassigned funds (surplus), net of any tax benefits that result. When a new determination of the amount of additional liability is made, the related intangible asset and the balance accumulated in unassigned funds (surplus) shall be eliminated or adjusted as necessary. Measurement of benefit obligations The PBO for pension plans and the APBO include obligations for all plan participants and all benefits provided under the plan, whether or not vested. Obligations attributable to nonvested employees are excluded; obligations attributable to partially vested employees are included only to the extent of their vested amounts. Same as US GAAP. Obligations for ancillary benefits (e.g. death and disability benefits) are accrued prior to the date of the triggering event (e.g. date of death or disability) in accordance with FAS 87. Obligations for protected, nonvested benefits and for nonvested, nonqualified benefits prior to retirement when there is no longer a substantial risk of forfeiture are accrued in accordance with FAS 87. Measurement of plan assets In determining the expected return on plan assets and the 10% corridor for gain/loss amortization, a market related value of assets is used. The market related value is either fair value or a calculated value which spreads asset gains and losses over a period not greater than five years. For pension plans: same as US GAAP. For other postretirement benefit plans: In determining the expected return on plan assets and the 10% corridor for gain/loss amortization, the fair value of assets is used. The use of a calculated value is not permitted. In determining the expected return on plan assets and the 10% corridor for gain/loss amortization, the fair value of assets is used. The use of a calculated value is not permitted. Service cost The present value of benefits attributed under the benefit formula to employee service during the current period. The present value of benefits becoming vested during the current period. Same as US GAAP. 4 pwc

7 Amortization of net gain or loss Minimum amortization of a net unamortized gain or loss (excluding plan asset gains and losses not yet reflected in market-related value) is the excess of the net unamortized gain or loss over a corridor equal to 10% of the greater of the PBO or APBO and the market-related value of plan assets, divided by the average remaining service period of active plan participants. If all or almost all of a plan's participants are inactive, the amortization period is the average remaining life expectancy of the inactive participants. For pensions, same as US GAAP. For other postretirement benefits, same as US GAAP, except that the amortization period is equal to the average life expectancy of retirees and fully vested actives, whether all or almost all of the plan participants are inactive or not. In addition, the corridor is based on the greater of the benefit obligation or the fair value of assets. A calculated value is not permitted. Same as US GAAP, except that the corridor is based on the greater of the benefit obligation or the fair value of assets. A calculated value is not permitted. Gains and losses that are not recognized immediately as a component of net periodic postretirement benefit cost are recognized as increases or decreases in unassigned funds as they arise. Gains and losses that are not recognized immediately as a component of net periodic postretirement benefit cost are recognized as increases or decreases in OCI as they arise. Plan amendments Prior service costs are amortized over the average remaining service period (pensions) or average remaining period to full eligibility (other postretirement benefits). If all or almost all of the plan participants are inactive (for pension plans) or fully eligible (for other postretirement plans), the amortization period is the average remaining life expectancy of the inactive or fully eligible plan participants. Same as US GAAP except that plan amendments are only reflected for vested participants. Note that for other postretirement benefits, the amortization period is equal to the average life expectancy of the company's fully vested and retiree group. Same as US GAAP. In the year of adoption of the new standards, any prior service cost attributable to nonvested employees and recorded in unassigned funds is amortized as a component of expense over the average remaining service period of the nonvested employees who were active at the time of the amendment. Prior service costs that are not recognized immediately as a component of net periodic postretirement benefit cost are recognized as increases or decreases in OCI as they arise. Gains and losses that are not recognized immediately as a component of net periodic postretirement benefit cost are recognized as increases or decreases in unassigned funds as they arise. Timing of settlements and curtailments If a settlement occurs, the gain or loss is recognized when the transaction is irrevocable, e.g. when annuities have been purchased or lump sums have been paid. If a settlement occurs and the net result is a loss, the loss is recognized at the time of the settlement. If a settlement occurs and the net result is a gain, the gain is not recognized until the proceeds are Same as US GAAP. 5 pwc

8 If a curtailment occurs and the net result is a loss, the loss is recognized when it is probable that the curtailment will occur and that the effects can be reasonably estimated. If the net result is a gain, the gain is not recognized in earnings until the employees terminate or the plan suspension or amendment is adopted. received by the reporting entity. Similarly, if a curtailment occurs and the net result is a loss, the loss is recognized when it is probable that the curtailment will occur and that the effects can be reasonably estimated. If the net result is a gain, the gain is not recognized in earnings until the employees terminate or the plan suspension or amendment is adopted and the proceeds are received by the reporting entity. Disclosures ASC (FAS 132(R)) was effective for fiscal years beginning after December 15, ASC provides for reduced disclosure requirements for nonpublic entities. Same as US GAAP, except that the ASC disclosure requirements apply to only vested employees. Obligations related to nonvested or employees are disclosed separately. In addition, the reduced disclosure requirements for nonpublic entities under ASC do not apply. All companies are required to follow the disclosure requirements included in ASC & Same as US GAAP except that the reduced disclosure for nonpublic entities permitted under US GAAP is not permitted under SAP. For pension plans, disclosures relating to OCI in ASC apply to unassigned funds (surplus) on a statutory basis. Other postretirement benefit disclosures relating to OCI in ASC apply to income on a statutory basis. Consolidated/holdi ng company plans In a parent-subsidiary arrangement, where the subsidiaries issue separate financials, for each subsidiary's separate financial statements the arrangement should be accounted for as a multiemployer pension plan. Accounting for the postretirement benefit plan as a multiemployer plan requires that a subsidiary's contribution for the period be recognized as net periodic The employees of many reporting entities are eligible for certain postretirement benefits provided by a parent company or holding company. A reporting entity with employees who are eligible for those benefits and is not directly liable for those related obligations shall recognize an expense equal to its allocation of: postretirement benefits other than pensions earned during the period. A liability shall be established for any such No material changes from SSAP 89 and SSAP pwc

9 postretirement benefit cost. A liability would be recognized for any contributions due and unpaid. Each subsidiary should provide the disclosures required by ASC as well as any related-party disclosures required by ASC 850, Related Party Disclosures. amounts due, but not yet paid. the required contribution to the pension plan for the period. A liability shall be established for any such contributions due and unpaid. The reporting entity shall disclose in the financial statements that its employees participate in a plan sponsored by the holding company for which the reporting entity has no legal obligation. The amount of the postretirement benefit expense incurred and the allocation methodology utilized by the provider of such benefits shall also be disclosed. If the reporting entity is directly liable for postretirement benefits, then the reporting entity should apply the guidance described in SSAP 14 and SSAP 89. Tax considerations The pension asset or liability that is recognized may result in a temporary difference, as defined in ASC 740, Income Taxes (formerly FAS 109). The deferred tax effects of any temporary differences shall be recognized in income tax expense or benefit for the year and shall be allocated to various financial statement components, including other comprehensive income, pursuant to ASC (formerly paragraphs of Statement 109) Pension accruals typically are not deductible for tax purposes unless they are funded during the tax year or before the filing of the tax return for the year of accrual. To the extent unfunded, pensions create deductible temporary differences. If pension accounting results in a prepaid asset for SAP purposes, a taxable temporary difference may result. However, the prepaid asset will likely be non-admitted, meaning that the SAP basis is zero. The tax basis is also zero as the tax law does not recognize such an asset. No material difference from current SSAP. 7 pwc

10 Let s talk For more information, please contact our authors: Ken Stoler, New York (646) ken.stoler@us.pwc.com Debbie Rudin, New York (646) debbie.rudin@us.pwc.com or your regional Human Resource Services professional: Charlie Yovino, Atlanta (678) charles.yovino@us.pwc.com Terry Richardson, Dallas (214) terrance.f.richardson@us.pwc.com Ed Donovan, New York Metro (646) ed.donovan@us.pwc.com Scott Pollak, San Jose (408) scott.pollak@saratoga.pwc.com Craig O Donnell, Boston (617) craig.odonnell@us.pwc.com Todd Hoffman, Houston (713) todd.hoffman@us.pwc.com Bruce Clouser, Philadelphia (267) bruce.e.clouser@us.pwc.com Nik Shah, Washington Metro (703) nik.shah@us.pwc.com Pat Meyer, Chicago (312) patrick.meyer@us.pwc.com Carrie Duarte, Los Angeles (213) carrie.duarte@us.pwc.com Jim Dell, San Francisco (415) jim.dell@us.pwc.com 8 pwc