Note 10. After-Employment Benefit Liability
The Department of State provides after-employment benefits to both Foreign Service Officers (FSOs) and Foreign Service Nationals (FSNs). FSOs participate in the Foreign Service Retirement and Disability pension plans. FSN employees participate in a variety of plans established by the Department in each country based upon prevailing compensation practices in the host country. The table below summarizes the liability associated with these plans (dollars in millions).
|Foreign Service Officer|
|Foreign Service Retirement and Disability Fund||$19,091||$20,067|
|Foreign Service Nationals|
|Defined Contributions Fund||147||135|
|Defined Benefit Plans||51||79|
|Lump Sum Retirement and Voluntary Severance||300||285|
|Total After-Employment Benefit Liability||$19,589||$20,566|
Details for these plans are presented as follows.
Foreign Service Retirement and Disability Fund
The FSRDF finances the operations of the FSRDS and the FSPS. The FSRDS and the FSPS are defined-benefit, single-employer plans. FSRDS was originally established in 1924; FSPS in 1986. The FSRDS is a single-benefit retirement plan. Retirees receive a monthly annuity from FSRDS for the rest of their lives. FSPS provides benefits from three sources: a basic benefit (annuity) from FSPS, Social Security, and the Thrift Savings Plan.
The Department's financial statements present the Pension Actuarial Liability of the Foreign Service Retirement and Disability Program (the "Plan") as the actuarial present value of projected plan benefits, as required by the SFFAS No. 33, Pensions, Other Retirement Benefits, and other Post Employment Benefits: Reporting the Gains and Losses from Changes in Assumptions and Selecting Discount Rates and Valuation Dates. The Pension Actuarial Liability represents the future periodic payments provided for current employee and retired Plan participants, less the future employee and employing Federal agency contributions, stated in current dollars.
Future periodic payments include benefits expected to be paid to (1) retired or terminated employees or their beneficiaries; (2) beneficiaries of employees who have died; and (3) present employees or their beneficiaries, including refunds of employee contributions as specified by Plan provisions. Total projected service is used to determine eligibility for retirement benefits. The value of voluntary, involuntary, and deferred retirement benefits is based on projected service and assumed salary increases. The value of benefits for disabled employees or survivors of employees is determined by multiplying the benefit the employee or survivor would receive on the date of disability or death, by a ratio of service at the valuation date to projected service at the time of disability or death.
The Pension Actuarial Liability is calculated by applying actuarial assumptions to adjust the projected plan benefits to reflect the discounted time value of money and the probability of payment (by means of decrements such as death, disability, withdrawal or retirement) between the valuation date and the expected date of payment. The Plan uses the aggregate entry age normal actuarial cost method, whereby the present value of projected benefits for each employee is allocated on a level basis (such as a constant percentage of salary) over the employee's service between entry age and assumed exit age. The portion of the present value allocated to each year is referred to as the normal cost.
The table below presents the normal costs for 2014 and 2013.
As discussed in Note 1 sections Foreign Service Retirement and Disability Fund and Changes in Accounting Estimate there was a significant actuarial gain resulting from assumption changes determined appropriate by an experience study performed by actuaries retained by the Department. The Foreign Service Retirement Plans Actuarial Experience Study 2008 - 2013 describes extensive assumption changes, both economic and demographic. The economic assumption change related to merit salary growth experience. The merit salary increase is the portion of the overall annual pay increase that is over and above the annual general salary and locality pay increases, i.e., the salary increase derived from career longevity and promotions.
Demographic assumptions include the set of rates that predict certain events occurring to a group of employees or annuitants. Events of significance to a retirement system are those that result in a commencement or termination of a benefit payment. The events affecting active employees include reasons for leaving the service such as retirement, becoming disabled, terminating service, or death. The events affecting annuitants include, first and foremost, mortality.
The demographic assumption changes included revision of assumptions applicable to active employees to predict the likelihood of their future separation from service, including their probability of withdrawal, retirement, or becoming disabled. Also warranted was a change to adopt gender specific mortality rates for active employees as well as disabled, survivor, and child survivor annuitants. The actuarial gain of $1,343 million resulting from these demographic assumption changes can be seen in the table below.
The assumption changes for interest rate, $193 million loss; and inflation, $237 million gain, are not from the experience study. These changes arise in connection with each annual valuation and follow the guidelines of SFFAS No. 33.
Actuarial assumptions are based on the presumption that the Plan will continue. If the Plan terminates, different actuarial assumptions and other factors might be applicable for determining the actuarial present value of accumulated plan benefits. The following table presents the calculation of the combined FSRDS and FSPS Pension Actuarial Liability and the assumptions used in computing it for the year ended September 30, 2014 and 2013 (dollars in millions).
|Pension Actuarial Liability, Beginning of Year||$20,067||$19,434|
|Interest on Pension Liability||845||857|
|Actuarial (Gains) or Losses:|
|From Assumption Changes|
|Prior Year Service Costs||—||—|
|Total Pension Expense||(56)||1,527|
|Less Payments to Beneficiaries||920||894|
|Pension Actuarial Liability, End of Year||19,091||20,067|
|Less: Net Assets Available for Benefits||17,894||17,475|
|Pension Actuarial Liability - Unfunded||$1,197||$2,592|
|Rate of Return on Investments||4.17%||4.25%|
|Rate of Inflation||2.31%||2.43%|
Net Assets Available for Benefits at September 30, 2014 and 2013, consist of the following (dollars in millions).
|Fund Balance with Treasury||$—||$—|
|Accounts and Interest Receivable||178||185|
|Investments in U.S. Government Securities||17,792||17,364|
|Less: Liabilities Other Than Actuarial||76||74|
|Net Assets Available for Benefits||$17,894||$17,475|
Foreign Service Nationals' After-employment Benefit Liabilities
The Department of State operates overseas in over 180 countries and employs a significant number of local nationals, currently over 47,000, known as Foreign Service Nationals (FSNs).
FSNs do not qualify for any Federal civilian benefits (and therefore cannot participate) in any of the Federal civilian pension systems (e.g., Civil Service Retirement System (CSRS), FSRDS, Thrift Savings Plan (TSP), etc.). By statute, the Department is required to establish compensation plans for FSNs in its employ in foreign countries. The plans are based upon prevailing wage and compensation practices in the locality of employment, unless the Department makes a public interest determination to do otherwise. In general, the Department follows host country (i.e., local) practices and conventions in compensating FSNs. The end result of this is that compensation for FSNs is often not in accord with what would otherwise be offered or required by statute and regulations for Federal civilian employees.
In each country, FSN after-employment benefits are included in the Post's Local Compensation Plan. Depending on the local practice, the Department offers defined benefit plans, defined contribution plans, and retirement and voluntary severance lump sum payment plans. These plans are typically in addition to or in lieu of participating in the host country's LSSS. These benefits form an important part of the Department's total compensation and benefits program that is designed to attract and retain highly skilled and talented FSN employees.
FSN Defined Contributions Fund (FSN DCF)
The Department's FSN Defined Contributions Fund provides after-employment benefits for FSN employees in countries where the Department has made a public interest determination to discontinue participation in the LSSS. Title 22, Foreign Relations and Intercourse, Section 3968, Local Compensation Plans, provides the authority to the Department to establish such benefits and identifies as part of a total compensation plan for these employees. The Department contributes 12 percent of each participant's base salary to the Fund. Participants are not allowed to make contributions to the Fund. The amount of after-employment benefit received by the employee is determined by the amount of the contributions made by the Department along with investment returns and administrative fees. The Department's obligation is determined by the contributions for the period, and no actuarial assumptions are required to measure the obligation or the expense. The FSN DCF is administered by a third party who invests contributions in U.S. Treasury securities on behalf of the Department. Payroll contributions are sent to the third party administrator, while separation benefits are processed by the Department upon receipt of funds from the third party. As of September 30, 2014, approximately 12,000 FSNs in 30 countries participate in the FSN DCF.
The Department records expense for contributions to the FSN DCF when the employee renders service to the Department, coinciding with the cash contributions to the FSN DCF. Total contributions by the Department in 2014 and 2013 were $22.4 million and $21.5 million, respectively. Total liability reported for the FSN DCF is $147 million and $135 million as of September 30, 2014 and 2013, respectively.
Local Defined Contribution Plans
In 50 countries, the Department has implemented various local arrangements, primarily with third party providers, for defined contribution plans for the benefit of FSNs. Total contributions to these plans by the Department in 2014 and 2013 were $22.7 million and $20.8 million, respectively.
Defined Benefit Plans
In 12 countries, involving over 3,400 FSNs, the Department has implemented various arrangements for defined benefit pension plans for the benefit of FSNs. Some of these plans supplement the host country's equivalent to U.S. social security, others do not. While none of these supplemental plans is mandated by the host country, some are substitutes for optional tiers of a host country's social security system. Such arrangements include (but are not limited to) conventional defined benefit plans with assets held in the name of trustees of the plan who engage plan administrators, investment advisors and actuaries, and plans offered by insurance companies at predetermined rates or with annual adjustments to premiums. The Department deposits funds under various fiduciary-type arrangements, purchases annuities under group insurance contracts or provides reserves to these plans. Benefits under the defined benefit plans are typically based either on years of service and/or the employee's compensation (generally during a fixed number of years immediately before retirement). The range of assumptions that are used for the defined benefit plans reflect the different economic and regulatory environments within the various countries.
As discussed in Note 1, the Department accounts for these plans under guidance contained in International Accounting Standards (IAS) No. 19, Employee Benefits. In accordance with IAS No. 19, the Department reported the net defined benefit liability of $51 million and $79 million as of September 30, 2014 and 2013, respectively. The change was a decrease of $28 million and $27 million in 2014 and 2013, respectively.
The material FSN defined benefit plans include plans in Germany and the United Kingdom (UK) which represent 80 percent of total assets, 73 percent of total projected benefit obligations, and 72 percent of the net defined benefit liability as of September 30, 2014. The Germany Plan's most recent evaluation report, dated September 15, 2014, is as of July 1, 2014. The UK Plan's most recent evaluation, dated October 22, 2014, is as of April 6, 2014. For the Germany Plan, the change in the net defined benefit liability was a decrease of $7 million in 2014 and $39.5 million in 2013, while for the UK Plan, the change was a decrease of $22 million in 2014 and $11 million in 2013. For 2014, the decreases in net defined benefit liability were primarily due to a combination of returns on plan assets, gains on changes in actuarial assumptions for the UK plan, and one-time employer deficit contributions of $3.3 million for the Germany plan. The decrease in 2013 was primarily due to a one-time employer deficit contribution of $39.7 million for the Germany Plan.
The tables below show the changes in the projected benefit obligation and plan assets during 2014 and 2013 for the Germany and UK plans (dollars in millions).
|Benefit obligation beginning of year||$327||$311|
|Actuarial (gain) loss on assumption change||—||—|
|Other actuarial (gain) loss||—||—|
|Value of New Benefit||—||—|
|Benefit obligation end of year||$322||$327|
|Fair value of plan assets beginning of year||$260||$194|
|Return on plan assets||18||19|
|Contributions less Benefits Paid||9||44|
|Fair value of plan assets end of year||285||260|
|Net Defined Benefit Liability||$37||$67|
The table below shows the allocation of the plan assets by category during 2014 and 2013 for the German and UK plans.
|Money Market and Cash||6%||11%|
|Mixed (Debt & Equity Securities)||—||—|
The principal actuarial assumptions used for 2014 and 2013 for the Germany and UK plans are presented below:
|Discount Rate||3.50 - 6.40%||4.00 - 5.90%|
|Salary Increase Rate||2.25 - 4.80%||2.25 - 4.70%|
|Pension Increase Rate||2.00 - 3.50%||2.00 - 3.40%|
Retirement and Voluntary Severance Lump Sum Payments
In 73 countries, FSN employees are provided a lump-sum separation payment when they resign, retire, or otherwise separate through no fault of their own. The amount of the payment is generally based on length of service, rate of pay at the time of separation, and the type of separation. As of September 30, 2014, approximately 24,000 FSNs participate in such plans.
The cost method used for the valuation of the liabilities associated with these plans is the Projected Unit Credit actuarial cost method. The participant's benefit is first determined using both their projected service and salary at the retirement date. The projected benefit is then multiplied by the ratio of current service to projected service at retirement in order to determine an allocated benefit. The Projected Benefit Obligation (PBO) for the entire plan is calculated as the sum of the individual PBO amounts for each active member. Further, this calculation requires certain actuarial assumptions be made, such as voluntary withdraws, assumed retirement age, death and disability, as well as economic assumptions. For economic assumptions, available market data was scarce for many of the countries where eligible posts are located. Due to the lack of creditable global market data, an approach consistent with that used for the September 30, 2014 FSRDF valuations under SFFAS No. 33 was adopted. Using this approach, the economic assumptions used for the Retirement and Voluntary Severance Lump Sum Payment liability as of September 30, 2014 and September 30, 2013 are:
|Rate of inflation||2.31%||2.43%|
Based upon the projection, the total liability reported for the Retirement and Voluntary Severance Lump Sum Payment is $300 million and $285 million as of September 30, 2014 and 2013, respectively, as shown below (dollars in millions):