In March 2012, the National Association of Insurance Commissioners (NAIC) adopted two new statements of statutory accounting principles (SSAP), SSAP No. 92 “Accounting for Post Retirement Benefits Other Than Pensions, A Replacement of SSAP No. 14” and SSAP No. 102 “Accounting for Pensions, A Replacement of SSAP No. 89”. These two statements are effective for interim and annual reporting periods beginning on or after January 1, 2013 and will have a significant impact on the statutory financial statements of insurance companies with defined benefit pension plans or other post-retirement plans. Early adoption is permitted.
The purpose of these two standards is to align statutory accounting principles with generally accepted accounting principles. The most significant change is going to be seen on the balance sheet of affected companies. For pensions, the liability previously recognized was generally the difference between the fair value of pension plan assets and an actuarial estimate of future benefits to be paid based on the compensation levels of participants as of the report date (commonly referred to as the accumulated benefit obligation or ABO). Under SSAP 102, the liability is calculated using an estimate called the projected benefit obligation or PBO. The PBO is similar to the ABO except it takes into consideration the expected rise in the compensation levels of active participants subsequent to the report date but prior to their retirement. The difference between the PBO and the fair value of plan assets will be recorded as a liability on the balance sheet. If the fair value of plan assets is greater than the PBO, the difference is recorded as a non-admitted asset which is consistent with the treatment of overfunded plans under existing statutory standards. For other postretirement benefits that fall under SSAP 92, the liability recorded will continue to be the difference between the ABO and plan assets.
Another significant change in accounting for both defined benefit pension plans and other post-retirement benefit plans relates to the treatment of benefits for unvested participants. Previously, when calculating the expense for benefits earned by participants (commonly referred to as service cost), benefits expected to be paid for unvested participants were excluded. The new standards require the benefits expected to be earned by unvested participants to be included as some of those participants are likely to become vested subsequent to the reporting date.
The new standards allow entities to recognize the surplus impact upon adoption either all at once as of January 1, 2013, or amortized over a period not to exceed 10 years, with a minimum liability at adoption equal to any unfunded ABO (the ABO less the fair value of plan assets).
These two new standards will have a significant impact on the preparation of the annual statement and the calculation of surplus. Reporting entities with defined benefit pensions and other post-retirement plans should take this into consideration when planning for the next year and beyond.
Author: Tim Nowak, CPA, Principal and Daniel Gibbons, CPA, Senior Associate