RSM 320 Class 6 Discussion Summary, References and Solutions

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1 RSM 320 Class #6 Discussion Summary, References and Solutions Question 1 Since a defined contribution plan transfers the risk of the future benefits to the employee, employers prefer defined contribution plans, all other things being equal (which they rarely are). This is one of the reasons why a trend toward defined contribution pensions has occurred which is shown by the following excerpt from Statistics Canada (http://www.statcan.gc.ca/daily- quotidien/110509/dq110509a-eng.htm): “Defined benefit plans most prevalent Just over 4,529,000 people, or 75% of those with a RPP, were in a defined benefit pension plan, a 0.5% increase. The rate of participation in these plans has declined constantly from more than 85% a decade earlier. Membership in the other most frequent type of plan, defined contribution, increased 2.4% to 961,845. This type has gained in popularity over the years and accounted for 16% of all RPP membership as of January 1, 2010. More than 85% of defined contribution members are in the private sector. Membership in hybrid and combination pension plans accounted for 9% of total membership.” In the U.S.  Milliman Corporate Pension Funding Study: http://www.milliman.com/Solutions/Products/Corporate-Pension-Funding-Study/ “Corporate Pension Funding Study The 2018 edition of the Milliman Corporate Pension Funding Study (PFS) is our 18th annual analysis of the financial disclosures of the 100 largest corporate defined benefit (DB) pension plan sponsors. These 100 companies are ranked highest to lowest by the value of their pension assets reported to the public, to shareholders, and to the U.S. federal agencies that have an interest in such disclosures.

2 We’re pleased to report that during 2017 the privat e single-employer defined benefit plans of the Milliman 100 companies made significant funding improvements. The Milliman 100 funded ratio settled at 86.0%, an improvement from the year-end 2016 funded ratio of 81.1%. The funding deficit dropped by a notew orthy $72 billion, ending the year at $252 billion.” … “Who are the Milliman 100 companies? The Milliman 100 companies are the 100 U.S. public companies with the largest defined benefit pension plan assets for which a 2017 annual report was released by March 12, 2018. This 2018 report is Milliman’s 18th annual study. The total value of the pension plan assets of the Milliman 100 companies was more than $1.55 trillion at the end of 2017.” Question 2 See Question 3, below. Question 3 No longer an option. Some of the key changes are: Assumptions regarding the interest rate and the discount rate  The amended IAS 19 requires that the interest charge (referred to as the finance charge) be calculated based on the funded status of the plan (accrued benefit obligation less plan assets determined for accounting purposes) using the same discount rate that was used to determine the accrued benefit obligation. This amount is shown in income (profit or loss).  Expected versus actual return on plan assets a. Since the amended IAS 19 requires the finance charge to be calculated on the funded status of the plan, the return on assets is separate into two components: i. the interest on the plan assets calculated by multiplying the plan assets by discount rate that is used to determine the accrued benefit obligation ii. the difference between the actual return on the plan assets versus the interest on the plan assets calculated in (i) above is shown as a remeasurement in other comprehensive income (OCI).  Treatment of past service costs a. The amended IAS 19 defines service costs to include current service costs and past service costs. Therefore, all past service costs are recognized immediately.

3  Treatment of actuarial gains and losses and other remeasurements (including the corridor approach) a. The amended IAS 19 has removed the corridor approach and requires all remeasurements to be included in other comprehensive income. Question 4 (a) DBRS argued that the health of pension plans is actually stronger today (i.e., the summer of 2011) than it was following the dot-com crash. However, in the months after the summer of 2011 there have been large fluctuations in markets due to many causes including the European crisis and reports that the recovery from the recession is slowing. Furthermore, DBRS clearly stated that the outlook for 2012 was contingent on the continued economic recovery in 2011 and onward. As a result, based on the research performed, you can argue either for or against the statement made by DBRS based on events that have happened since the summer of 2011 and your expectations for the economic recovery. (b) The 2008 financial crisis affected funding deficits in many ways including the returns on the plan assets during that period of time (a decrease of more than 25% in 2008) and the decrease in the interest rates used in the actuarial assumptions (discount rates dropped by approximately 70 basis points (0.7%) from 2008 to 2011, and therefore the pension obligation increased). (c) Defined contribution plans shift the risk of the performance of the pension to the employees from the employer, all other things being equal. Since defined benefit plans have many risks and uncertainties, companies are more and more willing to shift this risk to employees. This would result in the company having two pension plans until there are no longer any defined benefit pensioners to be paid. Some additional overall comments: 1. Although many pension funds shown an underfunded status, more than half of pension plans are in relatively good shape (defined by DBRS as being more than 80% funded). 2. The funding status is volatile based on the cyclicality of the economy. Therefore, it is challenging for management to maintain a consistently positive funded status. 3. The impact of the 2008 financial crisis has almost completely reversed thus showing the impact of the cyclicality mentioned in #2 above. 4. Due to decreased discount rates caused by the 2008 recession, ABOs hit all-time highs in 2010, again emphasizing the impact of #2 above. 5. Legislation requirements in addition to underfunded statuses have led to a drastic increase in contribution rates to help eliminate deficits. 6. Companies have many reasons to move away from defined benefit plans and towards defined contribution plans. 7. DBRS expected the deficits to be eliminated in a similar way as those of the dot-com crash in 2001 since capital markets are expected to improve and employer contributions have increased as per #5 above.

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4 8. Actuarial assumptions, especially the discount rates and the expected return, have a major impact on the funded status. 9. Demographic factors play a significant part in the funded status. (d) According to the three sources mentioned, 2013 was a good year for defined benefit pension plans. Because of improved investment returns, increasing long-term rates chosen, and actions by individual companies to better manage pension obligations, the financial status of these plans improved considerably. This, of course, demonstrates vividly the volatile nature of accounting results, especially under the amended IAS 19. Question 5 Class discussion. Question 6 See Teck’s 2017 spreadsheet (posted on portal). Question 7 Class discussion.