The Public Sector Alliance of Canada is asking the federal government to change the way it reports the unfunded liabilities of public sector pension plans, arguing the current practice makes the cost of the plans appear more volatile.
The federal government implemented a new discount rate methodology in 2017/18 for pre-2000 pension liabilities. It moved from using a 20-year average of long-term Government of Canada bonds to using a 10-year government bond rate, which is a better method for taking current low interest rates into account.
The change, which came following a request from Canada’s auditor general, impacted how the liabilities were measured and led to substantial increases in the federal deficit in the government’s fall economic updates, of about $20 billion in 2018 and $25 billion in 2019.
In its 2019 update, the government said it would consult on a proposal to improve the presentation of pension and benefit expenses in its financial statements by separately reporting the impact of remeasuring its pension obligations. Consultation took place from March 6 to June 12, 2020.
In its consultation submission, the PSAC said it agreed with separating out the cost of pre-2000 pension obligations. “The PSAC believes that the unique nature of future employee benefits promised as part of its members’ terms of employment warrants separate reporting. It further believes . . . that the magnitude and relative volatility of actuarial gain and losses run the risk of obscuring government spending on programs if they remain co-mingled with overall program expenses. Government should not rely on these gains and losses to either sponsor or cut other program spending, knowing that they are inherently transient and result directly from the method selected to evaluate these particular expenses.”
However, it also advocated for a wholesale rollback of the discount rate changes, saying they accentuate volatility and are misleading.
“Pension plans are long-term prospects over long-term horizons, so the fact that interest rates are currently low and have gotten lower over the last couple of years, that’s why you see increases in pension liabilities, but eventually interest rates are going to increase again and . . . liabilities will be reduced,” says James Infantino, pensions and disability insurance officer at the PSAC.
“Our position is [the government should] take a longer-term approach, like the 20-year turnover in government bond rates, to assess liabilities. That would result in a higher discount rate and lower liabilities.”
The PSAC also expressed concern that the volatility brought out by the new discount rate methodology would give fuel to “fiscal conservatives who constantly clamour” for public service spending cuts.
“What we were concerned about is, if [those swings in the deficit] kept happening and the federal government kept reporting them like that, we were going to hear backlash from a lot of people,” says Infantino. “We’re concerned that this shouldn’t be highlighted in the budget.”
The PSAC argued for the “careful selection of a format for disclosure, accompanied by narrative information,” to combat this potential issue. It suggested following the International Financial Reporting Standards’ approach to reporting revaluation gains and losses separately and including an explanation behind the numbers, such as the government’s choice to invest assets as of April 2000 and a sensitivity test for the pension obligations.
“While the resulting adjustments [to the discount rate] are an important part of providing an accurate picture of the government’s balance sheet, . . . they can also result in large swings in the budgetary balance, which have the potential to obscure underlying trends in government spending,” said Marie-France Faucher, media relations officer for the Ministry of Finance, in an emailed statement to Benefits Canada.
“The proposed approach is aimed at making it easier for users of the government’s financial plans and reports to see the effects of re-measurement gains and losses during a specific accounting period and providing a clearer view of planned and actual operating activities, enhancing transparency and accountability.”