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Normandin Beaudry

What companies listed on the S&P/TSX Index do in regard to the accounting standards applicable to employee future benefits


There, in black and white

Bulletin NB Vol. 9 N. 14, December 2006

Several companies in the private sector will soon finalize their budgets for the upcoming fiscal year and will be preparing their financial statements for the fiscal year that is drawing to a close. Among the disclosure notes that should be prepared for these financial statements is one which pertains to costs for defined benefit (DB) pension plans and group insurance plans offered to retirees (other post-employment benefits).

The required assumptions to determine the accrued benefit obligation and the cost must be established by the management of the company. To help companies select these assumptions, we have analyzed the annual reports of 29 Quebec-based companies listed on the S&P/TSX Index whose fiscal year ended between September 30, 2005 and March 31, 2006. All of these companies sponsored at least one DB pension plan and 23 of them offered at least one group insurance plan to their retired employees.

Our study is divided into three sections. The first section presents the assumptions used in percentile format. The charts present a comparison of the assumptions used for fiscal years ending in 2005 (between September 30, 2005 and March 31, 2006) and in 2004 (between September 30, 2004 and March 31, 2005). The second section summarizes the results of these charts along with additional data analysis. The third and final section presents our comments with respect to measures which would potentially affect future results.

Please note that this is the second year for this study. We therefore invite you to consult our Bulletin no. 16, vol. 8 to see the results, conclusions and comments of last year’s study. Please note, however, since the companies listed on the S&P/TSX change regularly with respect to predetermined criteria, the group of companies in this year’s study differ from those of last year’s study. This year’s results for year 2004 may then be different than last year’s results for year 2004.

1.Selection of assumptions

The following charts present the survey results of the key economic assumptions used for DB pension plans and other post-employment benefits in percentile format. 



End of 2005
(Sept. 30 2005 to March 31, 2006)

End of 2004
(Sept. 30 2004 to March 31, 2005)
Defined Benefit Pension Plans

Discount Rate
5th percentile5,56%6,50%
25th percentile5,30%6,00%
50th percentile5,25%6,00%
75th percentile5,00%5,80%
95th percentile4,97%5,48%

Expected Long-Term Rate of Return on Assets
5th percentile7,81%7,96%
25th percentile7,50%7,70%
50th percentile7,25%7,50%
75th percentile7,00%7,00%
95th percentile6,62%6,62%

Compensation Growth Rate (also applicable on some cases to other post-employment benefits)
5th percentile4,74%4,97%
25th percentile3,80%4,00%
50th percentile3,50%3,50%
75th percentile3,24%3,40%
95th percentile2,81%3,04%
Other Post-Employment Benefits

Discount Rate
5th percentile5,75%6,50%
25th percentile5,48%6,15%
50th percentile5,30%6,00%
75th percentile5,23%5,85%
95th percentile5,00%5,75%

Trend Rate for Health Care Costs - Initial Period
5th percentile12,00%12,80%
25th percentile10,50%10,50%
50th percentile9,50%9,90%
75th percentile7,90%7,70%
95th percentile7,12%6,98%

Trend Rate for Health Care Costs - Ultimate Period
5th percentile6,14%6,52%
25th percentile5,38%5,30%
50th percentile5,00%5,00%
75th percentile4,60%4,70%
95th percentile4,50%4,42%


  • For DB pension plans, the median discount rate used at the end of 2005 was 5.25%, compared to an annual median rate of 6.00% at the end of 2004. Nearly 90% of the surveyed companies used a discount rate between 5.00% and 5.50% at the end of 2005. There is, however, little variance in this assumption. Although the annual median discount rate fell by 0.75% from 2004 to 2005, about one third of the companies decreased their discount rate by 1.00% or more or by 0.50% or less. The observed range in this assumption might be explained, in particular, by the demographic profile of the members of the surveyed companies and the relative weight of DB pension plans outside Canada (a different discount rate may be used for DB pension plans outside Canada).
  • The annual median expected long-term rate of return on DB pension plan assets was 7.25% for 2005 as compared to 7.50% in 2004. Nearly 40% of the companies decreased this assumption between the two years observed. Moreover, four of the companies used a rate under 7.00% for 2005, whereas only one company did so in 2004. Since actuarial valuations may be performed once every three years, it is conceivable that this assumption might continue to be reduced, as was the case for many funding valuations made as of December 31, 2004 or as of December 31, 2005.
  • The proportion of DB pension plan assets invested in equities represented more than 60% of DB pension plan assets at the end of 2005 for 35% of the companies, as compared to only 15% at the end of 2004. This increase is probably due to the significant returns obtained in the Canadian and international equity markets in 2005.
  • Many companies sponsor DB pension plans and group insurance plans that offer salary-based benefits. These companies must establish an assumption related to the compensation growth rate. At the end of 2005, the annual median compensation growth rate was 3.50%, a rate identical to the one used at the end of 2004. However, despite these statistics, nearly a quarter of the companies in the study lowered their assumption between 2004 and 2005.
  • For companies offering a group insurance plan to retired employees, the median discount rate was slightly higher to the rate used for DB pension plans. At the end of 2005, as was the case in 2004, around 30% of the surveyed companies were using a discount rate that was higher than the rate disclosed for DB pension plans. This might be explained by the demographic profile of the members (they may not be the same) and the timing of benefits (incidence and indexation of benefits may be different).
  • The trend rate for health care costs is the most important assumption for group insurance plans offered to retirees. Given the significant increases witnessed over the last few years, health care costs are generally expected to rise at a higher rate in the short term (initial period) and gradually fall to a lower ultimate level. About 65% of the surveyed companies had used an initial rate higher than 9.00% in 2005, a proportion similar to the one observed in 2004. The variation of the trend rate might be explained, in particular, by the nature of claims (drugs, hospital, dental care, etc.) and the particular experience of the plans.
  • The ultimate median trend rate for health care costs was 5.00% at the end of 2005, as was the case at the end of 2004.


Measurement date

Approximately one quarter of the surveyed companies at the end of 2005 used a measurement date that differed from their fiscal year-end date. They used, as permitted by Chapter 3461 of the CICA Handbook, a measurement date somewhere within a three-month period preceding the end of the fiscal year date. This provision is used, in particular, by companies who wish to give themselves more time to prepare the disclosure notes in their financial statements.

In the United States, the same provisions with respect to the measurement date exist in the FAS. However, the adoption of the new FAS 158 in September 2006 will abolish this provision for fiscal years ending after December 15, 2008. In light of the FAS 158, the CICA, in the first quarter of 2007, will issue an exposure draft inspired by the FAS 158 and anticipate application for fiscal years ending as of December 31, 2007.

Eventually, Canadian companies will more than likely be required to issue their financial statements using a measurement date that falls on their fiscal year-end date.

Financial position vs. accrued benefit liability

For all of the surveyed companies, with the exception of only one, the financial position of pension plans at the end of 2005 was in deficit. However, for approximately 60% of them, an accrued benefit asset instead of an accrued benefit liability was presented in their financial statements. For the other companies, the accrued benefit liability was inferior to the deficit at the end of 2005. The difference is a result of the significant accumulated actuarial losses (losses represented approximately 20% of the accrued benefit liability at the end of 2005), which will be, in part (only the portion exceeding the 10% corridor), recognized sometime over the next 15 years or so.

The CICA propose a convergence of the Canadian standards towards the International standards by 2011. Similarly to the International standards, FAS 158 and possibly the exposure draft to be issued by the CICA in the first quarter of 2007, will force companies to recognize, in their financial statements, a larger portion of the accumulated actuarial losses. This will significantly deteriorate the financial statements of many Canadian companies over the next few years. 


Please feel free to contact us for additional information.

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