Review of Public Sector Accounting of retirement benefits
In 2014, the Public Sector Accounting Board (PSAB) identified, as part of a survey, the review of Section 3250 (Retirement Benefits) and Section 3255 (Post-employment Benefits, Compensated Absences and Termination Benefits) as one of its top priorities. With other accounting standards subject to major revisions in recent years, as well as the introduction of new types of pension plans in Canada, it is a good opportunity to review the provisions of PS 3250 and PS 3255 and determine if changes are required. Thus, PSAB established the Employee Benefits Task Force (Task Force) in 2015 to undertake the project. The Task Force decided to split the review process into two phases:
- Phase One addresses the deferral of experience gains and losses and discount rates, which could lead to amendments to the current standards.
- Phase Two focuses on how to account for the new types of defined benefit pension plans in Canada (shared risk plans, target benefit plans), multi-employer defined benefit pension plans and vested sick leave benefits. This phase will ultimately lead to the replacement of the existing PS 3250 and PS 3255 sections with a completely new comprehensive section.
The Task Force published the first Invitation to comment (ITC) in November 2016, which was focused on the deferral provisions of the standards. The February 2017 issue of News & Views outlined the main features of that ITC.
The Task Force has now published the second Invitation to comment (ITC) in November 2017, which is focused on the discount rate guidance in Section PS 3250.
Section PS 3250 does not provide specific guidance on which discount rate should be used to estimate the accrued benefit obligation. It refers to two discount rate bases in the examples used to illustrate the principle that actuarial assumptions underlying the valuation of retirement benefit liability and expense should be internally consistent. In practice, the expected return on plan assets is usually used to determine the present value of the accrued benefit obligation of benefit plans that are fully or partially funded. The entity’s cost of borrowing is usually used to determine the present value of the accrued benefit obligation of benefit plans that are unfunded.
PSAB needs to consider if the discount rate guidance in Section PS 3250 is sufficient and whether the two discount rates commonly used in the public sector are appropriate and provide useful information for accounting purposes because some concerns have been raised about the current practice. There are also concerns about using one discount rate basis to determine the accrued benefit obligation of plans that are fully funded and partially funded, and another discount rate basis to determine the accrued benefit obligation of plans that are unfunded.
This ITC suggests alternative bases to determine the discount rate assumption:
- Expected return on plan assets;
- Expected return of an effective hedge portfolio;
- Market yields of high-quality debt instruments;
- Market yields of risk-free debt instruments;
- The entity’s cost of borrowing; or
- The effective settlement rate.
An alternative discount rate approach could be any of the six discount rate bases identified above, reflecting one of three possible views: a current, average, or a projected view.
It is important to note that PSAB has not yet established a preliminary view on this issue, which is one of the main reasons why the ITC is seeking stakeholder input.
Stakeholders may send their comments until March 9, 2018.
The Task Force is planning to work in 2018 on the third Invitation to Comment, which will relate to Phase Two of the project. The effective date of any potential amendment to the standards will likely be a few years away as a result of PSAB’s due process.