Public employee retirement system reports: A study of user information processing ability
Willits, Stephen D
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Improved accounting reports should result when standards setters are provided with evidence regarding the ability of public employee retirement system (PERS) financial report users to (1) interpret reported pension information, and (2) Impound actuarial data. Accordingly, this study was conducted to gain insight into the decision making process(es) of PERS financial report users and preparers. A field experiment employing a simulated decision making situation was used to gather data. Respondents made judgments about a fictitious PERS and then completed two exercises that (1) measured their knowledge of the effects of actuarial methods and assumptions on reported data, and (2) tested their ability to properly consider these effects when comparing the funding of the fictitious PERS to that of other pension plans. Two general research questions were addressed: (1) does the benefit-liability measure used for PERS financial reporting and/or the amount of supplemental disclosure affect users' perceptions of the PERS financial condition, and (2) do users of PERS financial statements understand the effects that actuarial assumptions have on the reported benefit-liability measure? Analysis of the responses produced these findings: (1) respondents appeared to be functionally fixated on the reported funding status of the PERS and did not properly consider the underlying factors that affect this status; (2) a significant percentage of respondents understood the effects of the assumed rates of (a) salary increase and (b) return on plan assets on reported pension obligations, but did not recognize the effects of the actuarial cost methods presented; (3) mean responses were not affected by the presence of 10-year trend data; however, the inclusion of 10-year data did result in improved judgment consensus; (4) fixation on the reported funding status of the fictitious PERS was not limited to those respondents that had limited actuarial knowledge, but was found in all respondent groups; and (5) demographic characteristics had only a limited effect on respondent's decision models. These findings indicate (1) that communication between PERS financial report users and preparers needs Improvement, and (2) that financial report users have difficulty incorporating actuarial Information in their judgments. Accordingly, standards setters should standardize PERS reporting practices and/or seek ways to improve PERS disclosures.