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4.2 Significant events impacting pension plans
Publication date: 20 Dec 2023
us Pensions guide
The concept of delayed recognition of many gains and losses arising during the ordinary operation of a pension plan is a foundational concept in pension accounting. In addition, ASC 715 provides for delayed recognition of the cost of retroactive plan amendments (prior service cost). However, there are limits to delayed recognition and the guidance prescribes the minimum amortization into earnings of the various types of gains, losses, and prior service costs. Importantly, in the context of significant events, ASC 715 provides for proportionate recognition of unrecognized balances when all or a portion of a plan's obligation is settled (a settlement), or if benefits under a plan are eliminated or significantly reduced (a curtailment).
Outside of significant events that affect ongoing benefit plans, unamortized net gains or losses and prior service cost/credit accumulated in other comprehensive income are only reclassified from accumulated other comprehensive income to net income when all of the following conditions are met:
- All pension obligations are settled
- Defined benefits are no longer earned under the plan and the plan is not replaced by another defined benefit plan
- There are no remaining plan assets
- The plan ceases to exist
4.2.1 Definition of a settlement
A settlement is a transaction that (a) is an irrevocable action, (b) relieves the employer (or plan) of primary responsibility for a pension obligation, and (c) eliminates significant risk related to the obligation and the assets used to effect the settlement. For example, a pension benefit obligation may be settled by making lump-sum cash payments to participants, or by purchasing nonparticipating (and certain participating) annuity contracts for vested benefits. A settlement can also occur by transferring certain plan assets and obligations to the buyer of a part of a business. Thus, the employer's risk (e.g., mortality and investment risk) is transferred to the participant, insurer, or acquirer depending on the form of discharge, and the possibility of the employer experiencing future gains or losses related to that obligation and to the assets used to effect the settlement is eliminated. Settlements are discussed further in PEB 4.3.
4.2.2 Definition of a curtailment
A curtailment is an event that either (a) significantly reduces the expected years of future service of current employees (for example, employee terminations) or (b) eliminates the accrual of defined benefits for some or all future services of a significant number of employees (for example, a negative plan amendment). Examples of such situations are plant closings or partial shutdowns, whereby employees' service is terminated earlier than expected. Another example would be the termination of a pension plan. The suspension of a plan (i.e., a plan "freeze") pursuant to which employees no longer earn additional defined benefits for future service to the employer, but when future service counts toward vesting of benefits accumulated based on past service, may or may not result in a curtailment depending on the nature of the specific terms of the freeze. See PEB 4.4.3 for further guidance on the accounting for a plan freeze.
The disposal of part of a business, even if not resulting in a significant reduction in expected years of future service, may still require accounting similar to a curtailment. ASC 715-30-55-134 indicates that when a disposal does not result in an actual curtailment, the effects of the reduction in workforce on the plan’s obligation should be measured in the same manner as a curtailment (sometimes referred to as “curtailment-like” accounting) for purposes of determining the gain or loss on the disposal.
Judgment will be required to determine what constitutes a significant portion of expected years of future service or a significant number of employees; ASC 715 does not provide quantitative guidelines. In practice, a reduction in future years of service of 10% or greater, or elimination of the accrual of defined benefits for some or all of the future services of 10% or more of the employees, are generally considered to be significant; reductions of 5% or less generally would not be considered significant. Reductions between 5 and 10% should be evaluated based on specific facts and circumstances. Importantly, the significance determination for this purpose is based on plan-related employee information, not on the potential impact of the event on net income. As the unit of account for pension accounting is the plan, the significance determination should be evaluated separately for each plan.
Judgment may also be required when assessing whether layoffs are temporary. A curtailment only occurs when it is no longer probable that the specific employees will be rehired. For example, if a significant number of workers are furloughed for a period of months and others are hired to replace them, a curtailment has occurred. However, if the reporting entity has not replaced the workers, and, based on present intentions, it is reasonable to expect the furloughed employees to return to the work force, a curtailment has not occurred. A temporary layoff may still result in a curtailment if it is long enough in duration or affects enough of the plan participants that it significantly reduces the expected years of future service of present employees covered by the pension plan.
Curtailments are discussed further in PEB 4.4.
4.2.3 Definition of a plan amendment
Although most of the accounting for “significant events” revolves around settlements and curtailments, a plan amendment may also be considered a significant event. A plan amendment is a change in the terms of an existing plan, or, in some cases, the initiation of a new plan. Plan amendments can either increase benefits—a positive plan amendment resulting in prior service cost—or reduce or eliminate benefits—a negative plan amendment. In some cases, a plan amendment may even affect benefits attributed to years of service already rendered.
In some cases, plan amendments can lead to curtailments, but in other cases, they are just a significant event requiring an interim remeasurement of the plan. Plan amendments are discussed further in PEB 4.6.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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