The Advanced Program in Accounting and Auditing Regulation – Module 28Pension Funds Richard BerrDirector, Valuations and ReportingJune 20, 2006

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Agenda

Types of Plans

Investments-Recording and Valuation

Valuation of Liabilities

GAAP measurements versus regulatory measurements

Internal Controls and Enterprise Risk

Other Issues

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Types of Plans- Defined Contribution Plan

Employee and/or employer contributions based on percent of salary into individual account.

Employee bears the risk if investment returns are insufficient.

No predetermined benefit formula.

Plan has no liabilities for benefits.

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Types of Plans- Defined Benefit Plans

Promise to pay a series of payments.

Employer and/ or employee contributions are pooled into a general fund with no separate individual account.

Individual contributions have no determination in the amount of benefits.

Benefits are usually based on years of service and salary level.

Sponsor or sponsor and beneficiaries bear investment risk

Accrued benefits are treated as liabilities of Plan.

Measurement of assets and liabilities determine contribution and benefit rates.

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Recording of Investments

Purchases and Sales recorded on trade date basis

Dividend Income recognized on the ex-dividend date

Interest Income recognized on accrual basis

Investment income should include both realized and unrealized gains and losses.

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Valuation of Investments

What method should you use for valuing investments?

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FAIR VALUE

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Valuation of Investments-Fair Value

Definition of Fair Value

An estimate of the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.

Determination of Fair Value depends on instrument

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Valuation of Investments

Determination of Fair Value

Public Equities

Money-Market

Bonds

Hedge Funds

Derivatives

Private Equity, Real Estate, Infrastructure, Timber

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Valuations of Investments

Importance of Valuation Policy

Pricing Committee

New Product Process

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Valuation of Liabilities

Present value of future cash flows

Plan design has significant impact

Need to incorporate best estimates in determining cost of benefits

Rate of return on the assets

Salary escalation

Inflation

Difference between actual and estimates are recorded as experience gains or losses

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Valuation of Liabilities – Economic Assumptions

Discount Rate

Inflation

Regulatory issues related to benefit levels

Salary increases

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Valuation of Liabilities – Non-Economic Assumptions

Mortality and current year new entrants

Spousal Status

Withdrawal Rates

Retirement Rates

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GAAP versus Regulatory

Determination of surplus/deficit may not necessarily be the same

Financial statements disclose actuarial value under GAAP

Regulatory requirements are used to determine the level and timing of contributions and benefits

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Internal Controls and Enterprise Risk Management

Emphasis on internal controls increasing

Sarbanes-Oxley Act in the U.S.

Not required for pension plans but…

CFO and CEO certification of financial statements.

Documentation of internal controls.

Internal testing.

No evidence then no control.

Attestation by external auditors.

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Enterprise Risk

Key risks that may keep the business from completing its objectives

Annual assessment using COSO framework

Regular reporting of key operational risks

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COSO FRAMEWORK

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Other Issues

Consolidation of entities

Application of accounting pronouncements

Changing role of the external auditor