Tuesday, March 1, 2011

CAS 412 - Composition and Measurement of Pension Costs

CAS 412 - Composition and Measurement of Pension Costs. Pension plans are normally segregated into two types of plans; defined-benefit and defined-contribution pension plans. CAS 412 establishes the composition of pension costs, the basis of measurement, and the criteria for assigning pension costs to cost accounting periods. CAS 413 - Adjustment and Allocation of Pension Costs, which we will look at later, addresses the accounting treatment of actuarial gains and losses and the allocation of pension costs to segments within an organization.

This Standard has been fully incorporated into FAR (see FAR 31.205-6(j)) and therefore applies to all Government contractors, whether CAS covered or not. However, since very few contractors have defined-benefit plans these days, the complexities of this standard are not going to apply. Most of this standard pertains to defined-benefit pension plans and the parts that apply to defined-contribution plans are easy to understand and apply.

In a defined benefit pension plan, the contributions to be made by the contractor are calculated actuarially to provide pre-established benefits, e.g. a lifetime annuity. Under a defined-benefit plan, pension costs usually consists of four elements.

  • Normal costs
  • Amortization of any unfunded actuarial liabilities
  • Interest equivalent on the unfunded actuarial liability and actuarial gains and losses being amortized
  • Adjustment for actuarial gains and losses

"Normal costs" are the present value of future benefits earned by employees during the year using the projected benefit cost method (this method is described in the Standard)

Actuarial assumptions are related to the assumed or projected interest or return on funds invested and other projected factors such as future compensation levels, inflation, mortality, retirement age, turnover, and projected social security benefits

For defined-contribution pension plans, the pension cost for a cost accounting period is the net contribution required to be made for that period, after taking into account dividends and other credits, where applicable.

Under both defined-benefit and defined-contribution plans, the required contributions must be funded in order to be allowable. Increased costs due to late funding are not allowable under Government contracts.

The CAS Board is currently working on changes to CAS 412 to harmonize this standard with the Pension Protection Act of 2006.

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