ACCOUNTING STANDARDS APPLICABLE TO FUTURE GROUP BENEFITS: ASSUMPTIONS USED BY CANADIAN ORGANIZATIONS AND LATEST UPDATES
Several private sector organizations must include in their financial statements the recognition of their obligations toward defined benefit pension plans (DB pension plans) and other post-employment benefit plans, such as medical care plans offered to retirees (other benefits).
Again this year, Normandin Beaudry’s specialists analyzed the annual reports of Canadian organizations listed on the S&P/TSX 60 Index (60 largest organizations) and the S&P/TSX Mid Index (mid-cap organizations) for which the fiscal year ended between September 30, 2021, and February 28, 2022.
This analysis included about 65 organizations from the S&P/TSX 60 Index and the S&P/TSX Mid Index that sponsor at least one DB pension plan. Of these organizations:
- More than 80% also disclose information regarding other benefits.
- 85% disclose their results in accordance with international accounting standards, while the others disclose them in accordance with U.S. accounting standards.
The following charts show the key economic assumptions used by the organizations analyzed for their DB pension plans and other 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.
Each chart shows how the assumptions have evolved over time. Medians are represented by a solid line and shaded floating bars represent the range from the fifth to the ninety-fifth percentile.
It should be noted that several organizations offer plans in different countries. Some organizations disclose assumptions for plans in Canada separately, whereas others disclose average assumptions for all countries. While this could have an impact on the range of results, the median remains representative of Canadian assumptions.
The discount rate is one of the most important assumptions. 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 (for example, a lump sum amount upon retirement or annual payments until age 65 rather than lifetime benefits). The obligation’s sensitivity to the discount rate variation 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 following chart illustrates how the discount rates for DB pension plans and other benefits evolved over time.
- In 2020, the discount rate finished out at its lowest level in recent years. However, the trend resumed upwards in 2021 and the median reached a level similar to 2019.
- Since the beginning of 2022, the discount rate has continued to increase significantly to reach its highest level in recent years. This upward trend is expected to continue through the end of the year due to recent rate hikes announced by central banks.
- About one in four organizations disclosed separate discount rates for the defined benefit obligation and the defined benefit cost.
Many of the analyzed organizations sponsor DB pension plans and other 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.
The following chart illustrates how compensation growth rates evolved over time.
- Compensation growth rate assumptions for accounting recognition purposes have been stable for several years. It will be interesting to see what impact the current high inflation will have on this assumption.
The growth rate of medical care costs is a very important assumption for group benefits plans offered to retirees, as it shapes future costs and its growth is higher than overall inflation.
Most organizations use an initial rate that decreases over a specified period into a final rate, to be applied to subsequent years. The initial rate can vary significantly from one organization to another compared to the final rate, which usually varies less.
The following chart illustrates how the initial and final growth rates of medical care costs evolved over time.
- In recent years, there has been a downward trend in the growth rates of medical care costs. Once again, it will be interesting to see what impact the current high inflation will have on this assumption.
- The timeframe to reach the final rate can also vary significantly from one organization to another. About 70% of organizations that offer at least one medical care plan to their retirees use decreasing rates, over a period ranging from 10 to 20 years for most organizations.
In late July 2021, the Public Sector Accounting Board (PSAB) published a first exposure draft on Section PS 3251, the new standard for employee benefits that will apply to Canadian public sector entities. This standard would replace Sections PS 3250 (retirement benefits) and PS 3255 (post-employment benefits, compensated absences and termination benefits). In this exposure draft, the PSAB was seeking comments on deferral provisions (deferred recognition of actuarial gains and losses) and discount rate guidance.
This standard uses principles from the International Public Sector Accounting Standard (IPSAS 39, Employment Benefits). It would be effective for fiscal years beginning on or after April 1, 2026, and early adoption would be permitted. Consult our bulletin from August 2021 for a summary of the key proposed changes.
This exposure draft is the first component of the new work plan published in 2020. The PSAB has not yet published a final standard for this component. The subsequent components will address risk-sharing plans and other non-traditional plans, among other things.
The International Accounting Standards Board (IASB) has been working for several years on a project to improve the usefulness of the information to be provided in financial statement disclosures. This project is in response to a consultation that allowed users to express their concerns regarding current disclosure requirements that led to issues such as the lack of relevant information, surplus of irrelevant information, and ineffective communication of the information.
As a result, in March 2021, IASB published an exposure draft entitled Disclosure Requirements in IFRS Standards – A Pilot Approach, which proposes new guidelines for preparing and drafting more adequate disclosure requirements (for all its standards) in the future. In its pilot project, IASB proposed to replace the disclosure requirements for employee benefits (Section IAS 19) and those included in its standard on fair value measurement (Section IFRS 13). The proposed changes would require companies to comply with disclosure objectives and apply judgment to determine what to disclose.
The comment period was extended to January 2022 and deliberations are still ongoing. More information should be available later this year.
The Accounting Standards Board (AcSB) published an exposure draft on March 1 to amend Section 4600 (“Pension Plans”), the standard followed by preparers of pension plan financial statements. This section was developed in 2010 during the changeover to IFRS Standards in Canada and had not been amended since 2012. The proposed changes aim to address some issues and reduce the diversity in practice.
The proposed changes would:
- Provide recognition, measurement and disclosure guidance on the accounting for guaranteed annuity contracts (commonly referred to as “buy-in” or “buy-out” annuity contracts);
- Improve disclosures for investments in master trusts by requiring additional information on associated risks;
- Provide guidance on the treatment applicable to plan splits or plan mergers;
- Clarify the presentation requirements for defined contribution plans and combination plans, i.e., plans with a defined contribution and a defined benefit component.
The comment period ended on June 15. The proposed amendments would apply to fiscal years beginning on or after January 1, 2023 and early adoption would be permitted. It should be noted that the AcSB decided to prioritize the less complex issues that could be addressed on a timelier basis to improve the relevance of the standard in the near-term. The AcSB will consider addressing the remaining issues as part of subsequent amendment projects to the standard.
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