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

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

Again this year, Normandin Beaudry’s specialists 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 29 of the current year.

This analysis includes 60 organizations from the S&P 60 Index and the S&P MidCap Index that sponsor at least one DB pension plan. Of this number:

• 71% offer at least one medical care plan to their retirees.
• 86% disclose their results in accordance with international accounting standards, while the others (14%) disclose them in accordance with U.S. accounting standards.

The following charts present the key economic assumptions used by the organizations analyzed for their DB pension 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 is the most important assumption. Because it is based on market rates, it can vary from month to month. The discount rate can also vary depending on the methodology used to determine the market rate, the plan’s maturity profile and the duration of the coverage offered upon retirement (for example, a lump sum amount upon retirement or annual until age 65 rather than lifetime benefits). The sensitivity of the obligation to the discount rate movement depends on its duration. For example, for the same 0.1% decrease in the discount rate:

• a plan offering lifetime coverage, the obligation duration of which is 10 years, will see its obligation increase by 1%.
• a plan offering lifetime coverage, the obligation duration of which is 20 years, will see its obligation increase by 2%.

• The median annual discount rate used at the end of 2019 for DB pension plans was 0.76% less than the rate used at the end of 2018 (3.10% versus 3.86%).
• A decrease in short- and long-term interest rates of corporate bonds was observed over the course of 2019, which resulted in a decrease in discount rates for all organizations analyzed.

• The median annual discount rate used at the end of 2019 for the other post-retirement benefits was 0.80% less than the rate used at the end of 2018 (3.10% versus 3.90%).

• For organizations sponsoring both DB pension plans and other post-retirement benefits, the median discount rates used for all plans were identical.
• Furthermore, at the end of 2019, 51% of the organizations analyzed were using a discount rate for other post-retirement benefits identical to that used for DB pension plans.
• The historical evolution of median discount rates also shows the trend of using identical rates between the two types of benefits.
• Moreover, the rate is at its lowest level since the end of 2014.

Many of the organizations analyzed sponsor DB pension 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 of active members.

• At the end of 2019, the median annual compensation growth rate held steady at 3%, the rate observed at the end of 2018. Assumptions for the compensation growth rate for accounting recognition purposes have been stable since 2015.

The growth rate for medical care costs is an important assumption for other post-retirement benefits, as it influences the future level of costs and its growth is higher than overall inflation.

• 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 trend has been relatively stable at 4.50% for several years.

• The timeframe to reach the final rate can also vary significantly from organization to organization. The median at the end of 2019 was similar to the one used in late 2018, i.e., 9.5 years rather than 10 years.

Our specialists are here to help you better manage your plans and make the most of your decisions. Call us! Be on the lookout for our next bulletin on the latest developments regarding accounting standards in various sectors!