Management and Reporting of the Federal Public Sector Pension Plans

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Management and Reporting of the Federal Public
Sector Pension Plans

• Presentation by Phil Charko
• November 29, 2006

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Objectives of Presentation

• To provide an overview on the reporting of
  federal public sector pension plans and how they
  have evolved in the context of
• Legislative Requirements
• Accounting Practices
• Canadian Institute of Chartered Accountants
  (CICA) professional standards

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Types of Pension Plans

• There are two broad categories of employer
  sponsored pension plans in Canada
• Defined Benefit (DB) plan that promises a
  certain level of pension based on salary and
  years of service benefits paid to plan members
  are not tied to the amount of money contributed
  by the plan member there is a defined benefit
• Defined Contribution (DC) - pension schemes where
  the final entitlement is not certain and
  dependant on employee and employer contributions
  and investment returns
• 40 of working Canadians have access to these
  employer sponsored plans

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Defined Benefit Plans

• Todays presentation will focus on Defined
  Benefit (DB) plans
• Most DB plans are
• Regulated under federal or provincial pension
  benefits standards legislation such as the
  Federal Pension Benefit Standards Act (PBSA)
• Required to be funded with assets set aside and
  segregated from the operations of the plan
  sponsor to secure payment of future benefits
  against possible insolvency of employer
• Reported as per CICA standards 3461and Public
  Sector Accounting standard 3250

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Uniqueness of Federal Public Sector Pension Plans

• The three large federal public sector pension
  plans belong to the defined benefit category
• These plans are unique
• They are statutorily exempted from legislation
  such as the Federal Pension Benefits Standards
  Act (PBSA)
• They are legislated
• Public Service Superannuation Act (PSSA)
• Canadian Forces Superannuation Act (CFSA)
• Royal Mounted Canadian Police Superannuation Act
  (RCMPSA)
• Reporting requirements were first defined in the
  Civil Service Superannuation Act (CSSA) of 1924
• Federal public sector plans were not funded prior
  to 2000
• Obligation to pay defined benefits established by
  legislation and secured by the credit of the
  Government of Canada

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Federal Public Sector Pension Plans All Unfunded
Before 2000

• Setting aside of assets determines if a plan is
  funded or unfunded
• Up to April 2000, the Government relied upon its
  ability to raise funds in the future from tax
  revenues or external borrowings to pay benefits
  as they became due
• The Government had not set aside any money into a
  separate fund or separate legal entity
• The Government did not have a segregated pool of
  assets for the payment of pension benefits

These are unfunded pensions in the sense that
assets have not been put aside to pay for the
ultimate pension benefits (Supplementary
Information Observation by the Auditor General,
Public Account, Volume 1, 1996/1997)
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Pre-2000 Pension Account Transactions

• Prior to April 2000, Superannuation Accounts were
  used to track transactions and to record an
  estimation of the pension liability for each of
  the pension plans
• These were created as statutory accounts in the
  Accounts of Canada and are reported in the Public
  Accounts
• As required by statute, Superannuation Accounts
  were credited with
• Employer and employee contributions and pension
  transfers
• Employer contributions to cover deficits
• Interest on the accounts balances
• Superannuation Accounts were debited with benefit
  payments made out of the Consolidated Revenue
  Fund (CRF), and pension transfers
• The intention was that the net balance of these
  Superannuation Accounts approximate the pension
  liabilities

Superannuation Account balances are simply
tracking the result of statutory accounting
transactions
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Rationale for Tracking Account

• The Superannuation Accounts tracking approach
  was established with two purposes, according to
  Walter Riese, Chief Actuary, Government of
  Canada, 1969
• Increased disclosure to Canadian taxpayers to
  provide reasonably accurate assessment of the
  amount of pension obligations as they were
  accruing each year
• Provided additional protection to plan members so
  that future legislators could not argue that
  the plan was being operated without adequate
  recognition of the financial implications
• The use of these accounts led to a great deal of
  confusion about the character of the Accounts as
  it made them look like they comprised real assets

Even though unfunded, Government records and
reports Superannuation Accounts transactions for
purpose of reporting an approximation of its
pension liabilities
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Overview of Pre-2000 Account Balances

• During the 1970s and 1980s actuarial valuations
  indicated that pension liability was higher than
  account balances deficit
• The legislation required the government to credit
  the account to make up for the deficiencies
• By the end of 1990s however, amounts credited to
  the accounts exceeded government pension
  actuarial liabilities excess credited amounts
  totalled 33B
• Factors Leading To The Excess Credit Amounts
• Legislative inflexibility, for example
•        Lengthy period of very high account
  interest credits based on simulated (20 year
  bond portfolio)
•        Lower wage increases and inflation rates
  than expected
•        Legislative requirement of full employer
  contributions despite excess account credits
•        Safety margins in the assumptions

Even though legislation made it clear the
government was responsible for covering any
deficits, there were no provisions for
debiting excess credited amounts
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Introduction of Allowance Accounts

• Since the Superannuation Accounts failed to
  fairly represent the true liability, the
  Auditor-General (AG), qualified his audit opinion
  on the Governments financial statements through
  the 1980s
• In the same period, evolving Generally Accepted
  Accounting Principles (GAAP) required new
  accounting rules to be introduce to better
  reflect the governments pension obligation in the
  Public Accounts.
• In 1990, as provided for under the Financial
  Administration Act, allowance accounts were
  created that, together with the Superannuation
  Accounts, enabled a better reflection of the
  actuarial liability for pension benefits in the
  Governments financial statement
• Accounting standards also required over or
  under-estimation of pension liabilities to be
  gradually adjusted. The amortization of
  actuarial gains resulted in a reduction in annual
  pension expense starting in 1990-91
• This change enabled the AG to provide a clean
  audit opinion on this aspect

• Allowance Account
• Allowed to report more accurately the actuarial
  liability of the plans in the governments
  financial statements
• Had positive fiscal impact throughout the 90s
  because of the amortization of actuarial gains

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Change in Funding Status 1999 Legislation

• In 1999, the Public Sector Pension Investment
  Board Act (PSPIBA) was passed by Parliament in
  order to improve the financial management of
  federal public sector pension funds
• Important changes stemming from the PSPIBA to the
  pension plans
• Establishment of a Pension Fund for each plan,
  which provides for the external investments of
  contributions pertaining to service after April
  1, 2000
• Creation of a Public Sector Pension Investment
  Board (PSPIB) to manage the amounts transferred
  to it for investment under provisions under the
  Plans
• The Government remains solely responsible for
  assuming any shortfalls between the pension funds
  and the actuarial liability as well as between
  the obligation recorded in the Account and the
  actuarial liability

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1999 PSSA Amendments

• In 1999, amendments were made to the Public
  Service Superannuation Act (PSSA), notably
• Pensions became calculated on best of five years
  instead of best of six years
• The new act authorized the President of the
  Treasury Board to debit the Accounts in order to
  reduce the amount of certain excess credit
  balances in the Superannuation Accounts
• The 1999 amendments also made improvements to
  certain benefits, such as the supplementary death
  benefit

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Statutory Accounting and GAAP

• The legislation governing the Superannuation
  Accounts specified the debits and credits to the
  Accounts
• It did not anticipate all situations and possible
  corrections that may have been required to adjust
  the balance of the Accounts to fairly reflect
  the liability
• Although the Accounts were intended to record the
  liability, they include amounts calculated using
  methodologies that differ from normal accounting
  process (e.g. Government contribution and
  interest credited on the Account balances)
• This creates distortion from normal GAAP results
• Accounting is adjusted centrally to GAAP, using
  allowance and provision accounts under S.64 of
  FAA to record and present the pension liability
  in the financial statements (FS)

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Pension Accounts vs GAAP Presentation

• Pension Accounts Balance
• (-) allowance
• Net Book Value of liability
• Table 6.17 in Section 6, V 1 in the Public
  Accounts

• Actuarial value of liability
• Less Plan assets
• net pension liability
• (-) unamortized gains or (losses)
• Net Book Value of liability
• Note 7 to FS, Section 2, V1 in the Public
  Accounts

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Main differences in expenses

• Accounts (Statutory)
• Government Contributions
• Admin cost recovered
• Deficit funding
• Crediting of excess
• Interest credits on balance of account

• GAAP
• Current service cost
• Amortization of gains and losses
• Plan amendment cost
• Accelerated amortization
• Eliminate internal RCA tax
• Interest on average actuarial liability
• Less expected return on plan assets

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Pre and Post April 2000 Differences

• Pre April 2000 service
• Liability 1.3 / 2 per year of service
• Liability recognized in GOC Financial statements
• No assets set aside
• Pension liability

• Post April 2000 service
• Liability 1.3 / 2 per year of service
• Liability recognized in GOC Financial statements
• Less assets invested through Investment Board
• Pension liability

• The difference resides in how the liability is
  presented in the financial statements of the GOC
  either gross or net of assets
• The 1999 amendments did not affect the way the
  liability accrues for the GOC
• It also did not affect pension benefits that are
  to be paid to employees

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Conclusion

• Legislative requirements, accounting practices
  and professional standards have shaped the
  evolution and reporting of federal public sector
  pension plans
• Challenges impacting reporting include
• Complex and evolving CICA PBSA standards
• Hybrid nature of plans
• Improving disclosure
• Communicating pension plans to plan members is a
  priority and this should include information on
  the funding and reporting of the plans
• Pension Portal www.pensionandbenefits.gc.ca

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