Transcript CIA Pension Seminar

CIA Annual Meeting  Assemblée annuelle de l’ICA
CIA Annual Meeting
Assemblée annuelle de l’ICA
June 29 & 30, 2006  Les 29 et 30 juin 2006
Ottawa, Ontario
CIA Annual Meeting  Assemblée annuelle de l’ICA
PEN 3
Pension Accounting
Convergence and
International Standards
CIA Annual Meeting  Assemblée annuelle de l’ICA
Today’s Speakers
Jill Wagman, FSA, FCIA
Eckler Partners Ltd.
[email protected]
Paul Cherry, FCA
Chair, Accounting Standards Board
[email protected]
Ellen Whelan, FSA, FCIA
Mercer Health & Benefits
[email protected]
Catherine Robertson, FFA, FCIA
Eckler Partners Ltd.
[email protected]
CIA Annual Meeting  Assemblée annuelle de l’ICA
FASB Changes
Ellen Whelan, FSA, FCIA
Mercer Health & Benefits
CIA Annual Meeting  Assemblée annuelle de l’ICA
Background
• FASB takes steps to improve accounting
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Two-phase project approved last November
• Phase 1 focuses on balance-sheet recognition of funded status
• Phase 2 reconsiders all aspects of pension and other postretirement benefit
accounting
 Convergence with international standards
FASB Changes
CIA Annual Meeting  Assemblée annuelle de l’ICA
FASB Approves Two-Phase Project
Phase 1
Exposure draft released
60-day comment period ends
Revised FAS 87, 106 & 132 released
Revised FAS 87, 106 & 132 effective
2005
2006
11/10
3/31
5/31
Phase 2
You
are
here
2007
9/30
2009 - 2010
12/15
Phase 2 timeline
developed
Phase 2
effective?
CIA Annual Meeting  Assemblée annuelle de l’ICA
Phase 1 Key Changes
• Balance-sheet recognition of funded status (fiscal years ending after
Dec 15/06)
 No delay for non-public entities
• Assets and liabilities measured at fiscal year-end (fiscal years beginning
after Dec 15/06)
 One year delay for non-public entities
• Footnote disclosures modified consistent with new reporting
FASB Changes
CIA Annual Meeting  Assemblée annuelle de l’ICA
Phase 1 – Balance Sheet Recognition of Funded
Status - Requirements
• Amounts currently in footnotes move to balance sheet
• No new actuarial calculations
• Funded status = market value of assets – PBO / APBO
 Combine all overfunded plans and recognize as an asset
 Combine all underfunded plans and recognize as a liability
 OPEB and pension plans may be combined in balance sheet
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•
•
•
Balance sheet immediately reflects gains, losses, plan amendments
Balance-sheet changes flow through comprehensive income, not P&L
Comprehensive income recorded net of tax
Remaining initial transition amounts written off to retained earnings and
are not included in current year’s expense
FASB Changes
CIA Annual Meeting  Assemblée annuelle de l’ICA
Phase 1 – Balance Sheet Recognition of Funded
Status - Implications
• Potentially large, volatile reductions in shareholder equity raise concerns for:
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Measurements under incentive programs
Loan covenant requirements
Investor reaction
Financial ratios that are critical to employers in certain industries, such as banks
and insurance companies
 Regulatory limits on return on equity that limit revenue
• Equity reductions apply to other postretirement plans for the first time
• Plan design
 Full cost of future plan enhancements immediately recognized in balance sheet
 Unrecognized prior service costs no longer considered an “intangible asset”
reducing the charge to equity
• Balance-sheet adjustments required regardless of funded status, not just for
under-funded plans
 No accounting advantage in fully funding ABO
FASB Changes
CIA Annual Meeting  Assemblée annuelle de l’ICA
Phase 1 – Balance Sheet Recognition of Funded
Status - Retrospective Application
• Revise all prior balance sheets shown in financial statement to reflect
funded status of retirement plans
• Revise earnings and other comprehensive income statements for all periods
presented to reflect new approach
 Earnings statement changes if net benefit cost included recognition of transition
amount (regular amortization, settlement or curtailment)
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•
•
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Revise any other summary financials shown
Prior interim quarterlies are also revised as appropriate
No “cumulative effect” charge to earnings
For comparison only – prior statements are not reissued
Work can be done now assuming final statement doesn’t change
Company will need to figure tax effects
FASB Changes
CIA Annual Meeting  Assemblée annuelle de l’ICA
Phase 1 – Fiscal Year End Measurement Date Requirements
• Transition requires two measurements
 At current early measurement date for
• Prior year-end financial statement
• Adjustment to retained earnings
 At fiscal year-end for net benefit cost for next year
• Settlement or curtailment between measurements is recognized when it
occurs
• No retrospective application
FASB Changes
CIA Annual Meeting  Assemblée annuelle de l’ICA
Phase 1 – Fiscal Year End Measurement Date Implications
• Can’t finalize budgets until after fiscal year begins
• Difficulty compiling necessary data to meet SEC deadlines
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Discount rate determined with bond model
Value of illiquid assets (real estate, private equity)
Value of foreign plan assets
Retiree medical contributions equal to claims payments
Consolidated results from decentralized operations, especially non-U.S.
• May need to change processes
FASB Changes
CIA Annual Meeting  Assemblée annuelle de l’ICA
Phase 1 – Footnote Disclosures
• Eliminate disclosures that are no longer relevant
 Measurement date
 Additional minimum liability
• Reorganize certain information
 Eliminate reconciliation of funded
status
 Repackage gain (loss) and prior
service cost (credit) components
as reconciliation of OCI
• Add new disclosure
 Amortization payments included
in next year’s net benefit cost
Change in other comprehensive income
(before tax effects)
Amortization of (gain) /
loss
New actuarial gain /
(loss)
Amortization of prior
service cost
New prior service cost
Net change in other
comprehensive
income
• Implications - Can’t just mark up last year’s footnote
FASB Changes
2006
90
2005
90
2004
60
(90)
(200)
(210)
100
100
100
0
0
0
100
(10)
(50)
CIA Annual Meeting  Assemblée annuelle de l’ICA
Phase 2 Process and Objectives
• FASB will reconsider all aspects of existing accounting standards for all
postretirement benefits
• Phase 2 subject to progress on other projects currently on FASB’s agenda
• Project will be undertaken jointly with the IASB
• Expected to take several years to complete
 FASB aims to issue one or more documents for public comment by 2008
 No firm indication of when revised U.S. standards may take effect
FASB Changes
CIA Annual Meeting  Assemblée annuelle de l’ICA
Phase 2 Key Issues FASB will Consider
• What are the appropriate liability measures?
 ABO or PBO for pension plans?
 APBO or something else for retiree medical, other postretirement benefits?
• Should discount rate consider credit rating of the plan sponsor?
• Should the expense calculation
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Use actual return on assets?
Immediately recognize gains and losses?
Immediately recognize plan amendments?
Use different settlement or curtailment rules?
• How should the various components of expense be classified?
 Operating expense
 Financing expense
• How should multiemployer plans be accounted for?
FASB Changes
CIA Annual Meeting  Assemblée annuelle de l’ICA
International Update
Catherine Robertson, FFA, FCIA
Eckler Partners Ltd.
CIA Annual Meeting  Assemblée annuelle de l’ICA
Update on
• International Accounting Standards Board
• UK Accounting Standards Board
• International Actuarial Association
Pension Accounting – Convergence and International Accounting Standards
CIA Annual Meeting  Assemblée annuelle de l’ICA
IASB Goal
To develop, in the public interest, a single set of high quality, understandable
and enforceable global accounting standards that require high quality,
transparent and comparable information in financial statements and other
financial reporting to help participants in the world's capital markets and other
users make economic decisions.
Pension Accounting – Convergence and International Accounting Standards
CIA Annual Meeting  Assemblée annuelle de l’ICA
Current reach of International Financial Reporting
Standards
• 99 countries require or allow use of IFRS
• includes EU, Russia, Australia
• IASB working with Japan and China to minimize differences
• FASB and AcSB convergence projects
Pension Accounting – Convergence and International Accounting Standards
CIA Annual Meeting  Assemblée annuelle de l’ICA
Implications for Canadian Pension Plan Sponsors
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Canadian companies with subsidiaries or parents in IFRS jurisdictions
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Canadian companies raising capital in IFRS jurisdictions
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Investor comparisons
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Changes to US GAAP
Pension Accounting – Convergence and International Accounting Standards
CIA Annual Meeting  Assemblée annuelle de l’ICA
Update on IAS 19
• Pensions has not been highest priority
• Project expected to be added to agenda
– short term interim standard
– long term new standard, likely in conjunction with FASB
Pension Accounting – Convergence and International Accounting Standards
CIA Annual Meeting  Assemblée annuelle de l’ICA
Update from UK ASB
• Review on pension accounting
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two stage project on improved disclosure
– particular consideration to changes in UK legal and regulatory regime
– contribute to an internationally accepted standard
Pension Accounting – Convergence and International Accounting Standards
CIA Annual Meeting  Assemblée annuelle de l’ICA
Exposure Draft Issued May 31, 2006
• Replace FRS 17 disclosures with IAS 19
• Additional disclosures to address
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relationship between entity and trustees
– principle assumptions to measure liabilities
– sensitivity of liabilities to changes in principal assumptions
– how liabilities are measured
– future funding requirements
– nature and extent of risks arising from assets held
Pension Accounting – Convergence and International Accounting Standards
CIA Annual Meeting  Assemblée annuelle de l’ICA
Second stage expected to address
• how relationship between employer and pension plan best reflected in
financial statements
• quantifying the employer’s liability
• expected return on assets
• impact on financial reporting of pension regulation
Pension Accounting – Convergence and International Accounting Standards
CIA Annual Meeting  Assemblée annuelle de l’ICA
Update From International Actuarial Association
• Comments on practical issues with IAS 19
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discount rate
– corridor approach
– distinction between DB and DC
– treatment of death-in-service benefits
– treatment of tax on pension funds
Pension Accounting – Convergence and International Accounting Standards
CIA Annual Meeting  Assemblée annuelle de l’ICA
Pension Accounting – Convergence
and IFRS
Paul G. Cherry, FCA
Chair, Accounting Standards Board
CIA Annual Meeting  Assemblée annuelle de l’ICA
Current Status: Global Convergence on a Flawed
Standard?
• Basic model is same
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Extensive “smoothing”
Extensive use of assumptions
Delayed recognition of gains/losses
• Corridor approach
• Economic losses often reported as accounting assets
• Most important information often buried in footnotes
Pension Accounting – Convergence and IFRS
CIA Annual Meeting  Assemblée annuelle de l’ICA
FASB Phase I: Worth the Effort?
• AcSB has already bolstered pension footnote disclosure
• Impact on debt/equity ratios, debt covenants, etc.
• “Standards overload”
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Any change entails certain costs
Potential adverse impact on other projects
Pension Accounting – Convergence and IFRS
CIA Annual Meeting  Assemblée annuelle de l’ICA
Phase II
• Risk of “duelling projects”?
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FASB Phase II
IASB comprehensive project
• This seems contrary to working agreement between FASB/IASB
Pension Accounting – Convergence and IFRS
CIA Annual Meeting  Assemblée annuelle de l’ICA
Some Canadian Circumstances
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Regulatory and accounting rules differ for actuarial valuations
Uncertainties about ownership of surpluses
Frequency of actuarial valuations
CRA rules
Will greater accounting transparency cause shift to defined contributions
plans?
Pension Accounting – Convergence and IFRS
CIA Annual Meeting  Assemblée annuelle de l’ICA
AcSB Strategic Direction
• IFRS will be basis of reporting for public companies
• Transition plan
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Transition period approximately 5 years
Implementation plan: available June 30
• Avoid new/revised standards during transition that conflict with IFRS
Pension Accounting – Convergence and IFRS
CIA Annual Meeting  Assemblée annuelle de l’ICA
What Should AcSB Do?
• Follow FASB Phase I?
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Would create conflicts with IAS 19
• IASB gives free choice
• IASB choice also affects net income
• Adopt IAS 19 “free choice”?
• Wait for completion of IASB comprehensive project?
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Coincides with targeted crossover to IFRS
Pension Accounting – Convergence and IFRS
CIA Annual Meeting  Assemblée annuelle de l’ICA
Questions
CIA Annual Meeting  Assemblée annuelle de l’ICA
Paul Cherry
Paul grew up in Saint John, New Brunswick. He holds a Bachelor of Commerce from Queen’s
University and received his CA designation in 1974 at which time he became a Member of the
Institute of Ontario. In 1991, Paul became a Fellow with the Ontario Institute and in 2000 he
became a Fellow with the Institute of Chartered Accountants of New Brunswick.
Paul has over 25 years experience in public accounting. Most of that time was spent in Toronto
but since 1990 a large portion of his work involved international companies and international
accounting standards. He has served as Chief Accountant of the Ontario Securities Commission,
Senior Technical Partner of PricewaterhouseCoopers in Canada and Director of National
Accounting and Auditing Services of Coopers & Lybrand, Canada. Paul also served as a Canadian
Representative on the International Accounting Standards Committee which is based in London,
England and chaired the IASC Standing Interpretations Committee from 1997-2001. Paul is also a
former member and chair of the Canadian Emerging Issues Committee.
He was appointed chair of the Accounting Standards Board in May 2001. This is a full-time, paid
position. The Accounting Standards Board is responsible for establishing the basis on which
financial reports are prepared by all profit-oriented businesses in Canada as well as non-profit
organizations such as hospitals, museums and universities.
CIA Annual Meeting  Assemblée annuelle de l’ICA
Ellen Whelan
Ellen Whelan is a Principal in the Health and Benefits practice in the Toronto office of
Mercer Human Resource Consulting. Prior to joining Mercer in 1995, Ellen worked in the
Actuarial Services Branch of the Workers’ Compensation Board of Ontario for four years.
Ellen consults to both private and public-sector clients in the areas of group benefits and
workers’ compensation. In particular, she specializes in the valuation of non-pension, post
retirement and post employment benefits, sick leave gratuity plans, self-insured workers’
compensation benefits, and other employee group benefits. Ellen just ended a term as the
Chair of the Canadian Institute of Actuaries committee that has finalized the Standards of
Practice for Post-Employment Valuations.
Ellen holds a Bachelor of Science degree in Actuarial Science and Statistics from the
University of Toronto. She is a Fellow of the Society of Actuaries and a Fellow of the
Canadian Institute of Actuaries.
CIA Annual Meeting  Assemblée annuelle de l’ICA
Catherine Robertson
Catherine is a pension consultant in the Toronto office of Eckler Partners Ltd. Prior to
joining Eckler Partners in 2002, Catherine worked for a major life insurance company in the
United Kingdom.
Catherine consults to both corporate and non-profit organizations on their pension and
benefits plans. She specializes in pension plan design and funding, post-retirement benefit
accounting and administration. She also assists with union negotiations and executive
benefits.
She currently serves as a member of the CIA's Committee on Rules of Professional Conduct.
Catherine graduated from the University of Glasgow in 1994 with an Honours Bachelor of
Science degree in Mathematics. She is a Fellow of the Faculty of Actuaries (Scotland) and a
Fellow of the Canadian Institute of Actuaries.
CIA Annual Meeting  Assemblée annuelle de l’ICA
Jill Wagman
Jill is a Partner of Eckler Partners Ltd. and acts as the Toronto office pension practice leader.
A Fellow of the Society of Actuaries and the Canadian Institute of Actuaries, Jill has served
on the CIA’s Workers’ Compensation Committee for five years, acting as Chair for the years
2000 through 2002 and has served on a number of other committees, including a term as
Chair of the CIA’s Workers’ Compensation Committee from January 2000 to June 2002, and
as a member of the CICA’s Employee Future Benefits Implementation Guide Working
Group, as a representative of the CIA.
She presently serves as a member of the Committee on International Relations and acts as
the CIA liaison to the International Actuarial Association Committee on Pensions and
Employee Benefits. Jill also serves as the Chair of the Task Force on International Pension
and Employee Benefits Standards.
Jill graduated with distinction from the University of Waterloo with an Honours Bachelor of
Mathematics degree in 1990 and qualified as a Fellow of the Society of Actuaries and as a
Fellow of the Canadian Institute of Actuaries in 1994.