The evolution of public sector pension plans and its accounting implications

Public sector pension plans have evolved substantially in the past decade. New features and arrangements have been introduced to address plan sustainability. Participate in the discussion on how these plans should be accounted for.

Canadian public sector pension plans are known as innovators in governance and plan design. Changes in public sector pension plans have accelerated significantly over the past decade for economic and demographic reasons.

The cost of providing pension benefits has increased because:

  • plan members, like the general population, live longer
  • plan members age, resulting in fewer active members to support more pensioners
  • interest rates have stayed at a historic low for an extended period
  • the market has become more volatile after the 2008 financial crisis

Depending on each plan's circumstances, changes introduced in public sector pension plans range from changes in contribution rates and benefit formula, to more dramatic changes, such as conversion to target benefit or shared risk plans. An underlying objective of the changes is to address the sustainability of pension plans. Many changes involve the employer sharing more risk with plan members.

New plan features have been introduced to different types of public sector pension plans. These include setting a ceiling and/or floor to contributions, and allowing contributions and benefits to change based on the funded status of the plan. Making indexation of basic benefits conditional on the plan’s affordability is a common feature of many public sector pension plans.

A better-known new plan arrangement is target benefit plans, which provide a targeted, rather than a guaranteed, benefit, as would be in traditional defined benefit plans. There can be a wide range of target benefit plan designs with varying degrees of expected contribution and benefit volatility.

Also, many public sector pension plans now include features such as joint governance structure and sharing of plan surplus/deficit between employers and employees, that were once common features of joint defined benefit plans.

Resulting from these new developments is a diverse set of public sector pension plans, with varying degrees of risk-sharing between employers and employees. Many public sector pension plans have characteristics of more than one of the five types of plans addressed in the Public Sector Accounting Board (PSAB)'s standard, Retirement Benefits, Section PS 3250. Some also include new plan features that are not specifically addressed in Section PS 3250.

The five types of pension plans are:

  • defined contribution plans
  • defined benefit plans
  • joint defined benefit plans
  • multiemployer defined benefit plans
  • multiple-employer defined benefit plans

PSAB is considering whether the guidance for the five types of pension plans in Section PS 3250 would be sufficient to address the different degrees of risk the employer bears in all types of pension plans. Insufficient guidance may result in entities reporting pension obligations that do not reflect the risk and cost related to the pension benefits they bear.

We want to hear from you

You can influence PSAB’s deliberations on this topic by responding to PSAB’s recently issued Invitation to Comment, “Employment Benefits: Non-traditional Pension Plans,” by February 1, 2019. Also register for the webinar to learn about the key features of the Invitation to Comment from members of PSAB’s Employment Benefits Task Force.

Stay tuned for the article “Principles-based Approach to Accounting for Non-traditional Pension Plans” in the December issue of CPA Canada Member News.


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