Changing the expected rate of return under GAAP - why does this not change the pension obligation?

Hi there - ran across a question which basically said that changing expectations around the required rate of return on plan assets (i.e. a higher return) under GAAP has no impact on plan obligations.

Wouldn’t this result in a higher expected return which would lower the pension liability? Given this changes the periodic pension cost --> changes the net pension liability --> changes the plan obligations?

“Thus, under US GAAP, differences between the expected return and the actual return on plan assets represent another source of actuarial gains or losses. As noted, actuarial gains and losses can also result from changes in the actuarial assumptions used in determining the benefit obligation. Under US GAAP, all actuarial gains and losses are included in the net pension liability or net pension asset and can be reported either in P&L or in OCI.”

Thanks.

Under US GAAP the discount rate for the pension liability is chosen separately from the expected return on plan assets.

Thanks S2000.

Edit: I found another thread in which you replied to last year which (I think) has cleared it up (Pension Funded status question).

Just to confirm, is the below correct or am I overthinking it?

Actual return on plan assets affects the funding status as it’s a simple increase/decrease to the holdings, whereas expected return on plan assets does not affect the fair value of the plan assets and does not affect the pension obligation.

This because the difference in actual vs. expected returns as it relates to the periodic pension cost and therefore the funding status is netted out via actuarial gains/losses? I.e. Expected Return of $10 vs. Actual Return of $12 --> Periodic Pension Cost calculation has a -$10 and a -$2 to reflect the Actuarial Gain, so the Actual Return of $12 is mirrored anyway.

This is true.

This seems to be reversing cause and effect.

The fact (the cause) is that expected return on plan assets doesn’t affect the value of the assets and doesn’t affect the pension obligation (PV of liabilities). The effect is that to make everything balance, we have to eliminate the difference between actual return and expected return, which we do through OCI. This is not considered an actuarial gain or loss, but is included in OCI in the same manner as actuarial gains/losses. It is, in essence, an actuarial gain/loss, even though we choose not to call it that.

Gotcha, makes sense - thanks S2000.

My pleasure.