CFA Level 1

Liabilities - Post-Retirement Obligations


Post-retirement benefits include all retiree health and welfare benefits other than pensions and can include:
  • Medical Coverage
  • Dental coverage
  • Life insurance
  • Group legal services
These benefits are much more difficult to estimate than pension obligations. Under SFAS 106, employers have some latitude in making these estimates. The expected post-retirement benefit obligation is computed by taking the present value of expected post-retirement benefits.

Accounting for post-retirement benefits
  1. Accounting for post-retirement benefits is, to the extent it is possible, the same as for pension benefits.
  2. While the accounting methods are similar, the latitude described above is due to the dynamic nature of these types of benefits in general. For example, pension fund accounting uses industry standard actuarial assumptions, discount rates and long-term market assumptions. While the treatment of pension funds is quite mature, methods under SFAS 106 are evolving and the expected future costs of these benefits are more fluid.
  3. The main difference from an accounting perspective is that post-retirement healthcare benefits usually are "all-or-nothing" plans in which a certain level of coverage is promised upon retirement, and the coverage is independent of the length of service beyond the eligibility date. Cost is unrelated to service and is attributed to the years from the employee's date of hire to the full-eligibility date.
Elements of post-retirement benefit cost:
  • Service cost
  • Interest cost
  • Return on plan assets
  • Amortization and deferral
  • Amortization of unrecognized prior service cost
  • Amortization of transition asset and liability
SFAS 106 permits the amortization of the transition liability over 20 years, versus the average remaining service period of active employment found under pension plans.


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