Pension Plans and Enterprise Risk Management

CIA Pension SeminarColloque sur les régimes de retraite

April 16, 2007 Ÿ Le 16 avril 2007Toronto, Ontario

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

Concerns with current defined benefit Concerns with current defined benefit plan accounting modelplan accounting model Income statement smoothedIncome statement smoothed

Long term perspectiveLong term perspective Does not represent what happened in Does not represent what happened in yearyear Can show positive income in a loss yearCan show positive income in a loss year

Balance sheet does not show true Balance sheet does not show true asset/liabilityasset/liability

Often understates true liabilityOften understates true liability Information is in notesInformation is in notes

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

AlternativesAlternatives Full reconsideration of accounting Full reconsideration of accounting modelmodel

Include expense recognition, Include expense recognition, measurement etcmeasurement etc Display in financial statementsDisplay in financial statements Major project – several yearsMajor project – several years

Quick fix to balance sheetQuick fix to balance sheet Do not address other issuesDo not address other issues No change to incomeNo change to income

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

Agenda plansAgenda plans US Financial Accounting Standards US Financial Accounting Standards Board (FASB) Board (FASB)

Phase 1 complete Phase 1 complete — — FAS 158 effective FAS 158 effective 20062006 Phase 2 underwayPhase 2 underway

Broad projectBroad project Plan to be discussed Q1 or early Q2 Plan to be discussed Q1 or early Q2 20072007 Evaluating alternative approachesEvaluating alternative approaches

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

US FASB – Alternative approachesUS FASB – Alternative approaches Comprehensive reconsideration of model; Comprehensive reconsideration of model; oror Targeted phase with focus on issues such Targeted phase with focus on issues such as:as:

Delayed recognitionDelayed recognition Combining service costs, asset returns & Combining service costs, asset returns & financing costsfinancing costs Insufficient info about cash flowsInsufficient info about cash flows Measurement of the liabilityMeasurement of the liability Assumptions provide too much latitudeAssumptions provide too much latitude Insufficient & overly complex disclosuresInsufficient & overly complex disclosures

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

International Accounting Standards International Accounting Standards Board (IASB)Board (IASB)

Working group formed with Canadian Working group formed with Canadian member member Phase 1 Phase 1 - - 4-year project - 4-year project - discussion discussion paper Q4 paper Q4

Presentation & disclosure Definition of DB and DC arrangements & accounting for intermediate-risk plans Smoothing & deferral mechanisms Treatment of settlements & curtailments

FASB & IASB committed to common FASB & IASB committed to common approachapproach

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

Canadian Accounting Standards Board Canadian Accounting Standards Board (AcSB)(AcSB)

Harmonize with FAS 158 effective 2007Harmonize with FAS 158 effective 2007

(measurement date effective 2008)(measurement date effective 2008) Actively monitor IASB developmentsActively monitor IASB developments Support Canadian WG memberSupport Canadian WG member Adopt International standards in 2011 as Adopt International standards in 2011 as part of Strategic Planpart of Strategic Plan

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

AcSB released its Exposure AcSB released its Exposure Draft in March 2007 Draft in March 2007

(available at (available at www.acsbcanada.org)www.acsbcanada.org) 90-day comment period ending June 90-day comment period ending June 30, 200730, 2007 Includes highlights, key substantive Includes highlights, key substantive changes, and then less significant changes, and then less significant changeschanges Basis document to follow shortlyBasis document to follow shortly Issue final amendments to Section 3461 Issue final amendments to Section 3461 in last half of 2007in last half of 2007

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

Canadian EDCanadian ED Temporary hybrid solutionTemporary hybrid solution

Fix Balance Sheet – Income Statement Fix Balance Sheet – Income Statement laterlater

Balance SheetBalance Sheet Recognize plan assets less obligation as Recognize plan assets less obligation as EFB asset/liability using PBOEFB asset/liability using PBO No change in measurementNo change in measurement Valuation allowance for asset (US-CDN Valuation allowance for asset (US-CDN GAAP difference)GAAP difference)

Potentially significant impact on Potentially significant impact on financial ratios, debt covenantsfinancial ratios, debt covenants

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

Canadian EDCanadian ED Income StatementIncome Statement

Benefit cost and net income unchanged Benefit cost and net income unchanged from current Section 3461from current Section 3461 Smoothing aspects remain unchanged Smoothing aspects remain unchanged (amortization of actuarial gains/losses, (amortization of actuarial gains/losses, corridor etc)corridor etc) Not consistent with balance sheet Not consistent with balance sheet asset/liability, which does not include asset/liability, which does not include smoothingsmoothing

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

Canadian EDCanadian ED Other Comprehensive Income (OCI)Other Comprehensive Income (OCI)

Holding tank to balance the debits and Holding tank to balance the debits and creditscredits Current year actuarial gains/losses, past Current year actuarial gains/losses, past service costs included in OCIservice costs included in OCI Amounts in accumulated OCI are Amounts in accumulated OCI are amortized to net income (identical to amortized to net income (identical to current amortization of unrecognized current amortization of unrecognized amounts)amounts) Accumulated OCI includes actuarial Accumulated OCI includes actuarial gains/losses, past service costs, transition gains/losses, past service costs, transition balance not yet amortized to net incomebalance not yet amortized to net income

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

Canadian EDCanadian ED Measurement dateMeasurement date

Currently can measure plan assets and Currently can measure plan assets and obligation up to 3 months prior to year obligation up to 3 months prior to year endend New requirement – measure at year endNew requirement – measure at year end Tightens timeline for annual reportingTightens timeline for annual reporting

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

Canadian EDCanadian ED PresentationPresentation

Asset (overfunded plans) and Liability Asset (overfunded plans) and Liability (underfunded plans) separate(underfunded plans) separate Current liability – payments in next 12 Current liability – payments in next 12 months exceed assets (by plan)months exceed assets (by plan)

DisclosureDisclosure Amounts in OCI and accumulated OCIAmounts in OCI and accumulated OCI Effects of recognition and measurement Effects of recognition and measurement date provisions on the f/s in year of date provisions on the f/s in year of adoptionadoption

Pension Plans and Enterprise Risk Management

Corporate Pensions — An Accounting Perspective

Canadian EDCanadian ED Effective dateEffective date

Recognition 2007 (FASB 2006)Recognition 2007 (FASB 2006) Measurement date 2008Measurement date 2008 Private company deferralPrivate company deferral

TransitionTransition Not retrospectiveNot retrospective Recognition: Adjust current year Recognition: Adjust current year accumulated OCIaccumulated OCI Measurement date: stub period to Measurement date: stub period to retained earningsretained earnings