The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management

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May 2007

The Future Of Benefit Plans In Canada

By: Dan Clark

Youʼve probably noticed the prevalence of stock options in recent business news headlines, as companies deal with the fall-out from the backdating of stock options. However, stock options are not the only area of employee benefits that CFOs will have to be concerned about in the coming months.

Twenty years ago, accountants and actuaries introduced standards for reporting future employee benefits. Theyʼve made minor adjustments in the past, but the next few years will see significant changes to these standards. Just as stock options have come under greater scrutiny by investors and regulators, future employee benefits have become a target for change.

Future employee benefits include not only traditional pension plans, but also the medical and dental benefits that companies provide to their retirees. Post-retirement life insurance is also offered by some companies. Up until the early 1990s, companies were expensing these benefits on a cash basis. In the late 1980s and early 1990s, U.S. accounting standards were revised from a cash accounting basis to a basis that would reflect the true cost of these plans over the employeeʼs working lifetime. To soften the blow, the accounting standards provided for a transition period to allow companies to gradually reflect the impact over a period of time. In addition, the standards allowed any subsequent losses or gains, as well as the cost of any benefit improvements, to be smoothed over a number of years.

The outcome of all this smoothing was that the true funded position of the plans was not being recognized in the companyʼs balance sheet. Now that investors have realized this, they are demanding changes to the standards.

Where We Are Now

In 2006, the U.S. accounting standards were revised. Companies are now required to report the funded position of their post-retirement employee benefit plans in the balance sheet, not just in the footnotes. We expect that the Canadian accounting standards will undergo a similar revision in 2007.

The trend to full reporting of the funding position of employee post-retirement benefit plans is a global one. Itʼs expected that all companies reporting under international, U.S., or Canadian accounting standards will eventually have to include the true funded position of their post-retirement plans in the balance sheet.

Reporting the true funded position of employee post-retirement benefit plans will result in many companies reporting deficits. In many cases, these companies will want to review their plans and develop strategies to lower the deficits. The bad news is that itʼs very difficult to reduce medical and dental benefits for current retirees in Canada. Ontario courts have ruled that companies have an obligation to continue current medical and dental programs for existing retirees, even when the company has wound up its Defined Benefit pension plan. And, convincing retirees to accept a buy-out of their post-retirement medical and dental coverage is a hard sell.

future benefit plans Canada

How Employees Are Affected

Gone are the days when companies blindly promised life-time coverage for medical and dental benefits. Most companies didnʼt fully appreciate the long-term impact of granting these benefits when they first offered them in the last quarter of the 20th century. Benefit reduction – or even the elimination of post-retirement medical, dental, and life insurance benefits – is a real concern for future new retirees.

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