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Normandin Beaudry

Accounting standards applicable to employee future benefits: what Quebec-based companies do

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There, in black and white

NB Bulletin Vol 13. N. 14, December 2010

Several private sector companies will soon be finalizing their budgets for the upcoming fiscal year and preparing their financial statements for the current fiscal year. Included among the accompanying notes that should be prepared for these financial statements are those pertaining to costs for defined benefit pension plans (DB plans) and for group insurance plans offered to retirees (other post-retirement benefits).

The assumptions required to determine the accrued benefit obligation and the annual expense must be established by the company's management. To help companies select these assumptions, we have analyzed the annual reports of Quebec-based companies listed on the S&P/TSX Index whose fiscal year ended between September 30, 2009 and March 31, 2010. All of these companies sponsored at least one DB plan and the majority of them offered at least one group insurance plan for their retired employees.

Our analysis is divided into two sections. The first section presents the assumptions used by the companies included in our analysis in percentile format. The tables present a comparison of the assumptions used for fiscal years ending in 2009 (between September 30, 2009 and March 31, 2010) and in 2008 (between September 30, 2008 and March 31, 2009). The second section summarizes the findings from these tables and from our data analysis.

Please note that this is the sixth year that we have conducted this analysis. We therefore invite you to consult the "Publications" section of our website (www.normandin-beaudry.ca) to review the results, findings and comments for previous years. However, given that the composition of the S&P/TSX Index varies regularly based on predefined criteria, the group of companies analyzed this year may differ from that analyzed in prior years.

1. Selection of assumptions

The tables on the last page present, in percentile format, the key economic assumptions used by companies for DB plans and other post-retirement benefits. The assumptions are those that were in effect at the end of the fiscal year that has ended. However, the assumption used for the expected long-term rate of return on assets is the one that was in effect during the fiscal year that has ended.

2. Findings

  • For DB plans, the median annual discount rate used at the end of 2009 was 1.13% lower than the rate used at the end of 2008 (6.20% versus 7.33%). This decrease is the result of narrowing long-term yield spreads between federal and corporate bonds. The narrowing can be explained by the reversal in last year's trend marked by the "flight to quality" that ensued from the credit crisis. Discount rates have not, however, returned to pre-trend levels as the median rate used at the end of 2007 was 5.50%.
  • The median annual expected long-term rate of return on DB plans assets was 7.00% for 2009, down 0.12% from 2008 (according to the new basis for comparison for 2008, including one company not analyzed last year). In the last five years, companies have gradually lowered their long-term return expectations by an average of 0.10% per year.
  • Several of the companies analyzed sponsor DB plans and other post-retirement benefits that offer benefits based on salary at retirement. These companies must therefore establish an assumption related to the compensation growth rate. At the end of 2009, the median annual compensation growth rate was 3.50%, a rate identical to the median rate used since 2004. Outlooks for the compensation growth rate have not changed in the last six years.
  • For companies sponsoring both DB plans and other post-retirement benefits, the median discount rates used for all of the plans were similar. At the end of 2009, half of the companies analyzed were using a discount rate for other post-retirement benefits identical to that used for DB plans.
  • The trend rate for health care costs is the most important assumption for other post-retirement benefits. The initial rate, which is higher than the final rate, can vary significantly from company to company. The median final trend rate had been 5.00%, since 2004. However, at the end of 2009, the median final trend rate dropped 0.50% to 4.50%. This decline could be explained by lower increases in prescription drugs insurance costs than in the past, a coverage accounting for a large portion of other post-retirement benefits. We also observed a continuation in the upward trend in the decreasing rate period. 
 End of 2008
(Sept. 30, 2008 to
March 31, 2009)
End of 2009
(Sept. 30, 2009 to
March 31, 2010)
Defined Benefit Pension Plans

Discount Rate

5th percentile

7.50% 6.75%

25th percentile

7.50% 6.48%

50th percentile

7.33% 6.20%

75th percentile

6.83% 6.00%

95th percentile

6.04% 5.14%
Expected Long-Term Rate of Return on Assets

5th percentile

7.84% 7.50%

25th percentile

7.44% 7.25%

50th percentile

7.12% 7.00%

75th percentile

6.93% 6.85%

95th percentile

6.26% 6.27%
Compensation Growth Rate1

5th percentile

4.96% 4.98%

25th percentile

3.94% 3.83%

50th percentile

3.50% 3.50%

75th percentile

3.50% 3.50%

95th percentile

3.00% 3.00%
   1Also applicable in some cases to other post-retirement benefits
Other Post-Retirement Benefits

Discount Rate

5th percentile

7.50% 6.72%

25th percentile

7.45% 6.45%

50th percentile

7.10% 6.25%

75th percentile

6.76% 6.00%

95th percentile

6.36% 5.56%
Health Care Costs - Decreasing Rate Period

5th percentile

13.0 years19.3 years

25th percentile

10.0 years 15.0 years

50th percentile

8.0 years 9.0 years

75th percentile

4.0 years 9.0 years

95th percentile

3.4 years 3.0 years
Trend Rate for Health Care Costs - Final Period

5th percentile

5.33% 5.30%

25th percentile

5.00% 5.00%

50th percentile

5.00% 4.50%

75th percentile

4.50% 4.445%

95th percentile

4.35 % 3.55 %



 

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