Principles-based approach to accounting for non-traditional pension plans

Many public sector pension plans involve employers sharing risks with their employees and/or other employers. Learn how potential accounting guidance reflecting the risk assumed by employers could have a significant impact on their financial positions.

The evolution of Canadian public sector pension plans over the years has resulted in employers sharing different degrees of risk with their employees and/or other employers. These plans are referred to as “non-traditional pension plans” in the Public Sector Accounting Board (PSAB)’s Invitation to Comment, “Employment Benefits: Non-traditional Pension Plans .”

RISK ASSUMED BY EMPLOYERS IN TRADITIONAL PENSION PLANS

In traditional defined benefit plans, the benefit that plan members receive upon retirement is often defined in a benefit formula. In this case, the employer assumes risk if: 

  • any assets set aside and the related investment earnings are insufficient to pay for the benefits (investment risk), and
  • the plan’s actual experience differs from the expected experience that would affect the ultimate benefit payments (actuarial risk), such as if plan members live longer than expected

In traditional defined contribution plans, the employer does not assume the investment or actuarial risk because its contribution for employee services provided in each period is specified. The benefit that plan members receive upon retirement is dependent on the funds accumulated for each member and the related investment earnings.

RISK ASSUMED BY EMPLOYERS IN NON-TRADITIONAL PENSION PLANS

Employers may share the risk related to pension benefits with employees and/or other employers through:

  • setting limits on benefits and contributions
  • making benefits and contributions contingent on the plan’s funded status or other specified conditions
  • sharing plan surplus/deficit with employees, and/or
  • participating in a multiemployer plan

The first two in the above bullet list are referred to as “risk-sharing provisions”, and the last two bullets are referred to as “plan surplus/deficit-sharing provisions” in the Invitation to Comment.

A PRINCIPLES-BASED APPROACH FOCUSES ON RISK ASSUMED BY EMPLOYERS

The Invitation to Comment explores accounting principles and guidance that would reflect the risk employers assume in their pension obligations for all types of pension plans. It considers the following:

  • General principle. Employers should report their share of the accrued benefit obligation of the pension plan based on the substance of the plan’s terms and relevant factors, facts, events and circumstances.
  • Guidance for plans with “fixed” employer contribution requirement. It focuses on whether the employer has the obligation to make contributions when there are insufficient plan assets to pay for the benefits. That is, whether the employer assumes any risk.
  • Guidance for plans with risk-sharing provisions. The actuarial assumptions used to determine the accrued benefit obligation of the plan would reflect the effects of risk-sharing provisions on the future benefit payments.
  • Guidance for plans with surplus/deficit-sharing provisions. The employer would report its pro rata share of the accrued benefit obligation of the plan based on the surplus/deficit-sharing provisions.

WE WANT TO HEAR FROM YOU

You can influence PSAB’s deliberations on this topic by responding to PSAB’s Invitation to Comment, “Employment Benefits: Non-traditional Pension Plans,” by February 1, 2019.

To learn more, view the webinar and read the article “Evolution of Public Sector Pension Plans and Its Accounting Implications” in the November issue of CPA Canada Member News.

CONTACT

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