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© Copyright 2000 Rogers Media. The following article first appeared in the April 2000 edition of
BENEFITS CANADA magazine.
Accounting for promises
New rules will force plan sponsors to take a closer look at long-term pension and benefits
promises.
By Dian Cohen
Within the next few weeks, financial analysts around the world will be able to see much more clearly the
extent of Canadian companies' financial obligations to employees, past and present. And, over the next few
months, litigation may begin to determine exactly whose responsibility these obligations are. These linked
events come to us courtesy of the Canadian Institute of Chartered Accountants (CICA). The new CICA Handbook
Section 3461--the new accounting rules for employee future benefits--affects all companies with a financial
year end after December 1999.
CICA 3461 is a new standard for reporting not just pension obligations, but also other retirement benefits
such as healthcare and life insurance provided after retirement, as well as benefits offered after
employment but before retirement, such as disability payments and severance pay. In addition, Canadian
companies will now, like their counterparts in the U.S., have to account in advance for commitments (such
as cost-of-living increases) that are outside the contractual terms of their plans. They will also have to
use market-based discount rates to value pension, post-retirement non-pension benefits and post-employment
benefits.
The immediate impact of complying with CICA 3461 will perhaps wipe away as much as $500 million of book
value from the balance sheets of some well-known entities who book the liabilities retroactively. A KPMG
survey published in 1998 indicates that 61 of the 184 firms surveyed are listed on the Toronto Stock
Exchange and of those, 34 provide post-retirement benefits. The promise of drugs and extended healthcare
for life has created substantial liabilities that these companies had no opportunity to pre-fund.
Of course, not all firms are going to come up short. Some companies which haven't updated their pension
plan asset values for a few years will find that moving to market prices will create a significant amount
of income they can amortize over future years.
But there are some longer-term issues that will keep human resources staff busy. Doug Chandler, an actuary
at KPMG says, "HR people are going to have to work harder to understand the implications of the words
written in their handbooks of retiree and post-employment benefits. With increasing demands on the
healthcare system and all the changes taking place in healthcare delivery, we can already see the potential
for conflict when it comes to who should pay for what."
Long-term promises have long tails that will now be fully disclosed for all to see. Questions are already
arising about who represents whom when it comes to honouring the promise. Two examples come immediately to
mind. In the first instance, the Ontario government amended its Drug Benefit Act to include a $100
deductible and a $6 per prescription co-pay. Ontario Hydro's extended health benefits provisions, as
detailed in its handbook, did not (obviously) provide for the change. Ontario Hydro (now known as Ontario
Power Generation) tried to pass the higher cost on to the pensioners. But the Society of Ontario Hydro
Professional Workers filed a grievance on behalf of the pensioners, and Ontario Hydro was ordered to pay
the additional costs. In the second instance, at least half the provinces have instituted high
co-insurance, deductibles or premiums to participate, as a way of containing their drug plan costs.
These moves have implications for plan sponsors considering terminating drug coverage for people now
covered by their promises. In the future, more questions will be raised about whether or not unions
represent pensioners. Will there be cases, for example, in which unions bargain away retiree benefits in
favour of employee wages?
CICA 3461 was designed to facilitate consistent financial reporting globally. But its greatest benefit will
come from a rethinking of total compensation and the realization that long-term promises involve real
liabilities and real people. New and expensive designer drugs, pressure to cut government spending and a
witheringly competitive private sector are shaping up to pit irresistible force against immovable object,
with past employees and retirees in the middle.
Dian Cohen is an economics consultant with a special interest in pension issues.
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