FASB issues proposed ASU for market-return cash balance plans

Clarifying existing practice

Under ASC 715-30, assumed discount rates reflect the rates at which the pension benefits could be effectively settled. To estimate those rates, the guidance suggests that entities look to rates of return from high-quality fixed-income investments available during the pension benefit maturity period. However, for certain market-return cash balance plans, using high-quality fixed-income investments to estimate the discount rate often causes the measured benefit obligation to differ from – and often be higher than – the hypothetical account balances. Stakeholders have noted that because the projection rate (tied to market returns) and the discount rate (when based on fixed-income yields) are not the same, the benefit obligation does not accurately reflect the true settlement cost or the plan’s underlying economics. As a result, there are different interpretations of whether alternative rates of return can be used to estimate the discount rate if they better reflect the economics of the market-return cash balance plan.

To address this issue, the FASB has proposed amendments to ASC 715-30 that would require entities to use the assumed interest crediting rate as the assumed discount rate to measure the benefit obligation for certain market-return cash balance plans. This rate is the expected rate at which participant account balances are projected to grow under the plan’s market-based formula.

Proposed amendments to defined benefit plan discount rate guidance

Under the proposed amendments, for market-return cash balance plans meeting both of the following conditions, entities would be required to use the assumed interest crediting rate as the assumed discount rate to measure the benefit obligation.

• Pension benefits are communicated to employees in the form of an account balance comprising principal credits and interest credits based on an investable market return in any of the following forms:
      
  • the return on plan assets;
  • the return on a subset of plan assets that approximates the associated cash balance liabilities; or
  • the return on a regulated investment company.

• Participants have the option to elect lump-sum payments.

Other than this proposed narrow-scope amendment, the proposed ASU would not change how market-return cash balance plans are accounted for under ASC 715-30.

Proposed effective date and transition

• The effective date will be determined by the FASB after it considers stakeholder feedback on the proposed amendments.
• Early adoption would be permitted.
• Transition would be prospective at the entity’s next pension measurement date.
• Entities would be required to disclose the change in accounting principle in the interim and annual reporting period of adoption.