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Normandin Beaudry

Actuaries in the City


There, in black and white

Bulletin NB, Vol.8 N. 2, November 2008

Municipal edition

Municipal organizations sponsoring defined benefit pension plans will benefit from a new relief measure applicable for the preparation of 2009 budgets. The highlights of this measure are presented in this bulletin.

During the Table Québec-Municipalités held on October 31, 2008, the Union des municipalités du Québec (UMQ) urged the Ministère des Affaires municipales et des Régions (MAMR) to review accounting rules applicable to defined benefit pension plans for municipal organizations, given the current economic context that has lead to a significant increase of the pension expense.

On November 11, the Direction des finances municipales of the MAMR replied by announcing a tax relief measure designed to assist some 90 municipal organizations in their budget preparation for 2009.

This measure provides for a decline in the volatility of the pension expense, given that the current economic situation is exceptional and could be resolved in the coming years. The proposed measure is added to those already permitted by the accounting standards.

Existing measures:

  • The asset value can be determined through "asset smoothing." This method consists, for example, of calculating real returns on investments over expected returns from actuarial assumption, and amortizing the differences over a maximum period of five years, thus reducing the volatility of actuarial gains and losses.
  • Those actuarial gains and losses are then recognized over a longer period to delay the impact on the pension expense.

Proposed relief measure:

  • A municipal organization can reduce the impact on the pension expense by the portion resulting from gains and losses included in a corridor representing 10% of the maximum between the value of the obligation and the asset. This portion will be allocated to an amount to be paid in the future, which does not have to be amortized. This measure was inspired by the corridor methodology adopted in the private sector.

The use of this relief measure beyond 2009 must be clarified by the MAMR at a later time. For 2009, however, the combined use of "asset smoothing" and the proposed relief method will limit the volatility of the pension expense. Moreover, "asset smoothing - applied retroactively to December 31, 2007 would also reduce the pension expense for year 2008. Please note, however, that the corridor method, as proposed, can not be applied retroactively (for 2007 and 2008) and has no impact on the amount to be paid in the future for the initial deficit.

Below is a typical example of the impact of using the relief measures on the pension expense for 2009. The year 2008 is presented for comparison purposes. 

    2008 2009
Accounting Expense ($) ($) ($) ($)
- Operating expense 1,000 1,650 1,100 1,100
- Interest expense 100 600 150 150
- Amortization of the
amount to be paid in the
future (initial deficit)
10 10 10 10
- Allocation - amount
to be paid in the future
n/a n/a n/a (275)
Total 1,110 2,260 1,260 985

* "Asset smoothing" is applied retroactively to December 31, 2007.

 It is also important to note that in November 2006, MAMR allowed for certain relief measures for the accounting treatment of unfunded employee future benefits. You should thus assess the impact of all measures proposed by MAMR on the accounting expense.



Please feel free to contact us for additional information.

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Montreal, Quebec, H3B 1S6