Pension plan financial statements: properly interpreting net fiduciary position.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle

Anyone who is interested in the sustainability of pension benefits provided through a defined benefit pension plan will naturally desire information about the relationship between the present value of the benefits already earned by employees (total pension liability) and the resources accumulated and held in trust to pay those benefits (fiduciary net position). Specifically, interested parties like to focus on the difference between the two amounts (total pension liability--fiduciary net position = net pension liability).

In employer financial statements, the net pension liability is presented as a liability on the face of the employer's statement of net position. Employers do this because they are responsible for paying benefits if the resources accumulated in the pension trust ultimately prove insufficient for the payment of benefits. Pension plans, however, are not responsible for the payment of benefits beyond the resources held in the trust. Moreover, no purpose would be served by reporting a generic liability for future benefits payable equal to trust assets, given that all of the resources of a trust fund, by definition, are restricted for that purpose. Accordingly, a pension trust reports a liability only for benefit payments that are currently due and payable to beneficiaries. Viewed another way, a pension trust reports all of the assets accumulated to pay future benefits, but only those liabilities currently due and payable to beneficiaries. Consequently, even severely underfunded pension plans do not report a deficit, and the fact that the statement of net fiduciary position of a pension trust reports a significant fiduciary net position is, in itself, no indication that the plan is adequately funded.

Assume, for example, that an employer provides defined pension benefits through a single-employer plan. Further assume that the total pension liability for the employer is $100, the pension trust has accumulated $70 of plan assets, and there are $2 of benefits currently due and payable to plan beneficiaries. In that case, the pension plan would report a fiduciary net position of $68 ($70 plan assets--$2 benefits currently due and payable = $68 fiduciary net position). The employer, on the other hand, would report a $32 net pension liability among its liabilities ($100 total pension liability--$68 fiduciary net position = $32 net pension liability).

Individuals who are less experienced in pension accounting might...