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 plans) and group insurance plans offered to retirees (other post-retirement benefits) in their financial statements.

Again this year, we 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.

• More than 75 organizations sponsoring at least one DB plan are included in our analysis and 70% of them offer other post-retirement benefits.
• 85% of the organizations disclose their results in accordance with international accounting standards, while the remaining 15% percent disclose them in accordance with U.S. accounting standards.

The following charts present 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.

• The median annual discount rate used at the end of 2017 was 0.30% lower than the rate used at the end of 2016 (3.50% versus 3.80%).
• A significant increase in short-term interest rates and a slight decrease in long-term interest rates were observed in 2017, thereby flattening the yield curve.

• For organizations sponsoring both DB plans and other post-retirement benefits, the median discount rates used for all plans were similar.
• At the end of 2017, 50% of the organizations analyzed were using a discount rate for other post-retirement benefits identical to that used for DB plans.

• The historical evolution of median discount rates also shows the trend of using identical rates between the two types of benefits.
• Additionally, a downward trend in the rate level has been observed since the rate hike of late 2013.

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 of active members.

• The median annual compensation growth rate is holding steady at 3.00%, the rate observed at the end of 2016. Outlooks for the compensation growth rate for accounting recognition purposes therefore appear to have stabilized in relation to the downward trend observed prior to 2015.

The trend rate for health 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. However, the median has remained stable at eight years for organizations analyzed this year.

Since earlier this year, the Financial Accounting Standards Board (FASB) has made a number of decisions concerning amendments to disclosure requirements for future defined benefit pension plans, with the removal, addition and revision of certain requirements. The requirement for inflation sensitivity of medical and dental care for public business entities was among the requirements removed. The FASB must issue an “Accounting Standards Update” to formalize these changes, but the changes should be effective for fiscal years beginning after December 15, 2020 (including interim financial statements) for public business entities, and fiscal years beginning after December 15, 2021 for other entities. Early adoption will be permitted under certain conditions and a retrospective transition will be required.

In November 2017, the Public Sector Accounting Board (PSAB) published an Invitation to Comment on the discount rate provisions for employment benefits, included in Sections PS 3250 and PS 3255. The Invitation to Comment was to allow the PSAB to:

• obtain comments from various market participants on discount rate provisions; and
• identify potential alternatives and related considerations to examine before taking a position and publishing a new proposed Section on employment benefits through an exposure draft.

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 part of Phase I of the project, which also addresses the deferral provisions (for which an Invitation to Comment was published in November 2016).  Phase II will address other aspects such as target benefit plans, multi-employer plans, etc.

For additional information, feel free to contact Normandin Beaudry’s consultants.