Impact on pension expense under international accounting as at July 31, 2015

Every year, companies must establish an expense for their defined benefit pension plans.

The graph shows the expense impact for a typical pension plan that starts the year at an arbitrary value of 100 (expense index). The expense is influenced by changes in the discount rate based on high quality corporate and provincial (adjusted) bonds and the median return of pension fund assets.

Expense Index from December 31, 2014

Expense Index from December 31, 2014

The following table shows the discount rates for varying durations and the change since the beginning of the year. A plan’s duration generally varies between 10 (mature plan) and 20 (young plan).

Discount rate

Discount rate

Due to the decrease in the discount rate, the pension expense has increased by 7% (for a contributory plan) since the beginning of the year.

Please contact your Morneau Shepell consultant for a customized analysis of your pension plan.

Comments

  1. The expense is established as at December 31, 2014, based on the average financial position of the pension plans used in our 2014 Survey of Economic Assumptions in Accounting for Pensions and Other Post-Retirement Benefits report (i.e., a ratio of assets to obligation value of 95% as at December 31, 2013).
  2. The return on assets corresponds to the return on the Morneau Shepell benchmark portfolio (60% equities and 40% fixed income).
  3. The actuarial obligation is that of a final average earnings plan, without indexing (two scenarios: with and without employee contributions).

*The rates as at December 31, 2014 were revised to reflect a refinement in the methodology used.