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As at September 30, 2012 - Impact on pension expense under international accounting

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

The following 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) bonds1and the median return of pension fund assets.

Expense index from december 31, 2011

The pension expense has risen by 18% since the beginning of the year due to a decrease in the discount rate since December 31, 2011. However, the pension expense has remained stable this month due to returns on plan assets that were above expectations, despite the fact that the discount rate decreased again in September 2012.

The table below 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).

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

Comments:

  1. The discount rates shown reflect the educational note published by the Canadian Institute of Actuaries entitled Accounting Discount Rate Assumption for Pension and Post-employment Benefit Plans (September 2011).
  2. The expense is established as at December 31, 2011, based on the average financial position of the pension plans used in our 2011 Survey of Economic Assumptions in Accounting for Pensions and Other Post-Retirement Benefits report (i.e. a ratio of assets to obligation value of 85% as at December 31, 2010). Also, we are assuming that, under the international accounting, the employer elected the exemption at transition with regards to past gains and losses, and that future gains and losses are recognized in other comprehensive income (excluded from expenses shown).
  3. The return on assets corresponds to the return on the Morneau Shepell benchmark portfolio (55% equities and 45% fixed income).
  4. The actuarial obligation is that of a final average earnings plan, without indexing (two scenarios: with and without employee contributions).