Five years after Ontario’s auditor general uncovered an issue with the way the province was including pension assets in its financial statements, the office is proposing changes related to accounting in defined benefit pension plans.
The auditor general’s 2016 annual report revealed a deficit of $5 billion, while the province’s government set the deficit at $3.5 billion. Central to the disagreement was an accounting difference involving the Ontario Public Service Employees’ Union pension plans and the Ontario Teachers’ Pension Plan.
The province considered the surpluses in the pension plans as government assets, which auditor general Bonnie Lysyk called “problematic” at the time. Since the government doesn’t have the “unilateral legal right to access this amount without first receiving the formal written consent of plan members,” the surpluses should stay out of the budget, stated an official statement from her office.
On the other side, an expert advisory panel assembled by the Ontario government to tackle the issue determined that including the surpluses as assets is fair. Indeed, the panel concluded it would be misleading not to include the province’s share.
In its 2020 annual report, the auditor general discussed the Public Sector Accounting Board’s employment benefits project, which aimed to improve certain existing sections of the Public Sector Accounting Standards by considering the changes in related accounting concepts and new types of pension plans that have been developed since they were issued decades ago.
The PSAB released its first draft for comment in July 2021, proposing to issue a new standard to replace these sections. If approved, the new standard would become effective for fiscal years beginning on or after April 1, 2026, and would be applied retroactively.
The new standard would account for actuarial gains and losses differently from the existing sections in that these amounts would no longer follow a deferral and amortization approach, said the 2021 annual report. Instead, revaluations of the net DB assets, which include actuarial gains and losses, would be recognized immediately on the statement of financial position within the net DB assets and “accumulated other,” a new component of net liabilities proposed by the PSAB.
“For greater clarity, revaluations of the net defined benefit liability (asset) are not reclassified to the surplus or deficit in a subsequent period. This immediate recognition of actuarial gains and losses would have a significant impact on the province’s consolidated financial statements.”
As of March 31, 2021, Ontario reported about $8.9 billion of unrecognized net actuarial gains relating to its employee pension plans and other employee future benefits. Under the proposed standard, the province would recognize this entire amount as a decrease in liabilities and accumulated deficit within its consolidated statement of financial position, said the report, noting the province will no longer defer and amortize actuarial gains and losses in its consolidated statement of operations.
“While we support the immediate recognition of actuarial gains and losses on the statement of financial position, we do not agree with the use of the proposed ‘accumulated other’ category to record the revaluations of net defined benefit liabilities (assets),” stated the report. “By using this approach, revaluations will not be reported in the statement of operations and they are not reclassified from ‘accumulated other’ to the surplus or deficit in subsequent periods. In other words, this allows public sector entities to bypass the annual surplus or deficit by directly recognizing gains and losses in net assets or liabilities.”
The new standard would also allow a public sector pension plan sponsor to assess the funding status of a plan to determine the appropriate discount rate, with plans falling under one of three statuses: fully funded, partially funded or unfunded.
Plan sponsors with fully-funded plans would use a discount rate based on the expected market-based return on their assets, where the balance of assets is projected to be greater than or equal to the benefit payments to beneficiaries.
In contrast, the discount rate used for unfunded plans would be determined by reference to the market yields of provincial government bonds, which is consistent with the province’s existing practice of discounting its funded and unfunded pension plans. And for partially funded plans, plan sponsors would use a single discount rate that reflects both a fully-funded rate — for periods where the balance of plan assets is projected to be sufficient to cover projected benefit payments — and an unfunded rate for all other periods.
“As we stated in our response to PSAB’s exposure draft on discount rate guidance, we believe that the market yield of high-quality debt instruments is the most appropriate basis for determining the discount rate,” said the annual report. “The market yield is based on verifiable, observable third-party data, effectively reducing subjectivity and facilitating comparability between public sector entities’ post-employment benefit plans.
“However, we are generally supportive of PSAB providing additional discount rate guidance to reduce the variability in practice. We will continue to monitor the development of standards impacting the accounting for employment benefits.”