Posted by Michael A. Mast, CPA
Underfunded defined benefit plans have always been a concern, but the Great Recession magnified the underfunded status of many plans. The increase in retirees and significant investment losses were the perfect storm that exacerbated the problem.
As a result, many American multiemployer pension plans are underfunded. Underfunded pension plans expose participating employers to financial risk because most collective bargaining agreements require employers to fund shortages experienced by the plan. Defined benefit pension plans guarantee that participants will receive promised benefits, which the Pension Benefit Guaranty Corporation insures with certain limits. An employer participating in a multiemployer pension plan may be liable for its portion of the multiemployer pension plan’s underfunded liability. These commitments could become a significant liability to the employer, whose piece of the pie may be larger than they originally anticipated.
Annual Funding Notices issued by multiemployer pension plans inform the participating employers of the financial health of the plan. Financial statement users such as banks need additional information to analyze the employers’ share of the underfunded liability and its impact on future cash flows. As a result, financial statement users often request additional information regarding multiemployer pension plan liabilities.
In September 2011, the Financial Accounting Standards Board issued an Accounting Standard Update to Accounting Standard Codification 715-80 to respond to financial statement users’ requests. This Accounting Standard Update requires additional financial statement disclosures to facilitate the users’ understanding of the employer’s liability related to multiemployer plans and its potential effect on future cash flows. The information required by this update will provide a fuller picture of employers’ financial commitments. This update is effective for all comparative annual periods presented by public entity fiscal years ending after December 15, 2011 and for nonpublic entity fiscal years ending after December 15, 2012. Here is a full list of the required disclosures.
The more significant disclosure requirements are summarized below:
- Disclosure of all significant multiemployer plans, plan names and identifying numbers
- Level of the employer’s participation and if the employer’s contribution represents 5% or more the plan’s total contributions
- Financial health of significant multiemployer plans and if there are funding improvement requirements or contribution surcharges in place
- Nature of commitments, agreement expiration date, and any minimum required payments
- Any significant business changes affecting the comparability of the quantitative plan information
Employers are required to include the following detail, if not publicly available, using the plan’s identifying information:
- A description of the plan benefits
- A description of the extent to which the employer could be liable for the plan’s obligations
- Any other quantitative information necessary to help financial statement users understand the plan’s financial status
In the upcoming year, third-party administrators and actuaries of multiemployer pension plans should expect requests from employers for the information necessary to satisfy this Accounting Standard Update. This update requires service providers to accumulate significant additional information, but financial statement users will be better informed and the employers may get a rude awakening when they see the potential effect that participation in a multiemployer plan could have on their cash flow.