Employment benefits discount rate: Anything wrong with expected return on plan assets?

Read more about the debate on whether the expected return on plan assets, commonly used in the public sector in discounting obligations for funded benefit plans, is an appropriate discount rate for determining benefit obligation.

A recent stock contribution made by Boeing to its pension plan illustrates the debate over using the expected return on plan assets as the discount rate in determining employment benefit obligation.

The Public Sector Accounting Board is considering the appropriate discount rate guidance that should be provided in its employment benefits standard. The expected return on plan assets is usually used in calculating the obligation of fully or partially funded benefit plans in the public sector.

Why trade the goose when it can lay golden eggs?

Boeing contributed US$3.5 billion of its shares to its pension plan on August 1, 2017, according to a Bloomberg article, after the shares experienced a rally of 58 per cent in that year. The stock price nearly doubled in the previous 12 months. Boeing was betting that if its earnings can keep pushing its shares higher, it will be able to forgo contributions for the next four years.

This was not the first time. In 2009 Boeing contributed US$1.5 billion of its stock into its pension. The shares jumped 27 per cent that year and 21 per cent in 2010. By 2011, the plan cashed out the stocks. Boeing’s stock price has since gone up more than three times higher than it was at 2009. Would the pension be in a better funding position now had the pension plan not sold the 2009 stock contribution?

The Bloomberg article notes that the pension plan administrator expects to sell the 2017 stock contribution in 2018. One may question why, given that the stock price has doubled in the 12 months prior to the contribution and tripled in less than 10 years.

The pension plan’s decisions clearly demonstrated that the plan administrator, unlike Boeing, is not betting on the stock price history to repeat. The article notes that some pension experts also agree that it is not worth the risk because if anything goes wrong, the US$57 billion pension assets could easily end up worse off than before. The pension plan is expected to pay out about US$46 billion to retirees over the next decade.

Is the expected return on plan assets an appropriate discount rate?

Those who share the views of Boeing’s pension plan believe that, for stock performance, history is not necessarily a good predictor of the future. Also, the risk related to the investment needs to be considered when dealing with pension obligations.

Using the expected return on plan assets as the discount rate to calculate benefit obligation essentially assumes that the return has been earned. In reality, regardless of the expected and actual return on plan assets, an entity’s benefit obligation would not change.

Those who share the views of Boeing support this discount rate basis. They argue that plan assets are expected to accumulate over time through contributions and investment returns to meet the entity’s benefit obligation.

What Do You Think?

You can participate in this debate by responding to the Invitation to Comment, “Employment Benefits: Discount Rate Guidance in Section PS 3250,” by March 9, 2018.

To learn more, register for our January 16, 2018, webinar and read the following related articles:

Contact

Lydia P. So, MBA, CPA, CA
Principal, Public Sector Accounting Board
Tel: (416) 204-3281