Accounting standards applicable to employee future benefits: Assumptions used by Canadian organizations

Several private sector organizations must include the recognition of their obligations toward defined benefit pension plans (DB plans) and group insurance plans offered to retirees (other post-retirement benefits) in their financial statements.

The assumptions required to determine the defined benefit obligation and the defined benefit cost (the expense) must be established by the organization’s management. Again this year, we have analyzed the annual reports of Canadian organizations listed on the S&P 60 Index (60 largest organizations) and on the S&P MidCap Index (mid-cap organizations) whose fiscal year ended between September 30 of the previous year and February 28 of the current year. Close to 75 organizations sponsoring at least one DB plan are included in our analysis and 70% of them are offering other post-retirement benefits. Finally, 85% of the organizations disclose their results in accordance with IAS 19, and the remaining 15% percent disclose them in accordance with U.S. accounting standards.

Our analysis is divided into three sections:

• The first section presents the assumptions used by the organizations included in our analysis in percentile format. The tables present a comparison of the assumptions used for fiscal years ending in 2016 (between September 30, 2016 and February 28, 2017) and in 2015 (between September 30, 2015 and February 29, 2016).
• The second section summarizes the findings from these tables and from our data analysis.
• The third and final section presents additional information with respect to measures that could potentially impact future accounting results for some organizations.

The tables present, in percentile format, the key economic assumptions used by the organizations analyzed for DB plans and other post-retirement benefits. The assumptions are those that were in effect at the end of the fiscal year considered and used to calculate the obligation at the end of the fiscal year.

• For DB plans, the discount rate assumption is the most important assumption. Because it is based on market rates, it can vary from month to month. According to our analysis, the median annual discount rate used at the end of 2016 was 0.20% lower than the rate used at the end of 2015 (3.80% versus 4.00%). Despite the interest rate increase observed in the fourth quarter of 2016 after a decrease in the previous quarters, on the whole, interest rates continued to be low.
• Several of the organizations analyzed sponsor DB plans and other post-retirement benefits that offer benefits based on salary at retirement. These organizations must therefore establish an assumption related to the compensation growth rate. The median annual growth rate is holding steady at 3.00%, the rate observed at the end of 2015. Outlooks for the compensation growth rate for accounting recognition purposes therefore appear to have stabilized in relation to the downward trend observed over the past few years.
• For organizations sponsoring both DB plans and other post-retirement benefits, the median discount rates used for all plans were similar. Hence, 50% of the organizations analyzed were using a discount rate for other post-retirement benefits identical to that used for DB plans at the end of 2016.
• The trend rate for health care costs is an important assumption for other post-retirement benefits. The initial rate, which is higher than the final rate, can vary significantly from organization to organization. The final rate varies less from organization to organization and the median final trend rate has been relatively stable at 4.50% for the past several years.

• In March 2017, the Financial Accounting Standards Board (FASB) published amendments to the U.S. accounting standards requiring employers to report the service cost component in the same line item or items as other compensation costs and separately from other components of net benefit cost in the income statement. These amendments are designed to improve the consistency, transparency and usefulness of the information presented. The amendments are effective for fiscal years beginning after December 15, 2017 (including interim financial statements) for public business entities, and are effective for fiscal years beginning after December 15, 2018 for other entities. Early adoption is permitted under certain conditions.
• In late November 2016, the Public Sector Accounting Board (PSAB) issued an Invitation to Comment on the employment benefits deferral provisions (recognition of actuarial gains and losses and value of plan assets) outlined in PS 3250 and PS 3255. In 2016, the PSAB began its project to review Sections PS 3250 and PS 3255 and to eventually publish a new section on employment benefits. The Invitation to Comment is related to part of Phase I of the project that will also look at the discount rate. Phase II will address other aspects such as target benefit plans, multi-employer plans, etc.

Please feel free to contact us for additional information.