When Canadian taxpayers are on the hook for public sector pension plan obligations, these institutions must spell that out clearly in their financial reporting, according to a new paper by the C.D. Howe Institute.
“Reporting of pension costs as they accrue and net obligations at a point in time is tricky,” wrote William Robson, the organization’s chief executive officer and the paper’s author. “Pension payments will occur in the future — projecting even the simplest payment requires choosing a discount rate — and are subject to uncertainties such as longevity and future salaries.
“Many major pension plans in the broader public sector have benefits that are contingent on their funded status. Moreover, many major plans are multi-employer plans, even when governments are the unique or majority funders of the employers, it is not clear that governments are, or should be, responsible for funding shortfalls if a plan gets into trouble.”
Read: The impact of coronavirus on DB pension funding status, asset mix
Currently, the Public Sector Accounting Board is reviewing accounting standards that could affect the entities consolidated in government financial statements, noted the paper, which made several recommendations with the aim of fostering more complete reporting.
“A key one concerns public sector employers whose pension plans create exposure beyond the contributions they make each year, but show their annual contributions as their only cost and no pension-related obligations on their balance sheets,” wrote Robson. “We need clearer criteria for identifying contingent pension plans — often referred to as target-benefit plans — that involve employer-side funding risk that is genuinely small enough to ignore.”
The paper noted that plan sponsors, administrators and members require increased clarity on who bears the risk in these scenarios. “When employer-side risk is material, users of financial statements should see it. The best place to report it is in the financial statements of the employer. Some provincial governments currently show costs and obligations of pension plans in their broader public sectors that do not appear in the financial statements of the employers themselves.”
Read: DB regulations a bad fit for target-benefit plans, MEPPs: report
These situations are problematic, argued Robson, if a province chooses to increase support for public employer organizations with troubled pension plans. Such an active role by the province is inappropriate and poses the danger of leading employers and plan participants to expect a bailout if a plan is unable to meet its obligations.
“Canada’s multi-employer contingent benefit plans are large and growing,” wrote Robson. “Transparency about their costs and who bears the risks in these plans needs to keep pace.”