Feds Seek to Shake Up Discount Rates

Feds to review discount rates for pension, benefits obligations

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1120745_calculator_1The federal government is currently reviewing the discount rates it uses for its pension and benefits obligations, Finance Minister Bill Morneau said in the fall economic statement on Tuesday.

The project includes a review of industry practices, trends in the public and private sectors and emerging developments in accounting standards. The government expects to complete the review in the coming months and will share the results on or before the tabling of the public accounts in 2018.

The government’s three main pensions are the plans for the public service, the Canadian Forces and the Royal Canadian Mounted Police. According to the statement, the government’s funded pension benefits relate primarily to those earned after March 31, 2000, at which time it began funding certain plans on a go-forward basis.

The discount rate used for the government’s funded pension benefits is based on the expected rates of return on investment funds, which is typical practice for privately held corporations, says Todd Saulnier, vice-chair of the national policy committee at the Association of Canadian Pension Management. “So the typical investment strategy might be five or six per cent discount rate,” he adds.

But for unfunded benefits earned up to March 31, 2000, the government’s discount rate is based on long-term government of Canada bond rates, notes the economic statement, which also referred to obligations such as veteran benefits, health and dental coverage for retired employees, sick leave, severance and workers’ compensation.

For health benefits, using a discount rate that lines up with the cost of borrowing makes sense, says Saulnier. But what doesn’t make sense is the government using two different discount rates for its other plans. For contributions after March 31, 2000, it’s using the expected return on assets, while the discount rate for the portion of the obligation before that date is the expected borrowing cost.

“You typically wouldn’t see that,” says Saulnier. “There typically would be a single discount rate for the entire plan and that would be the return on assets. So if they were to move to that, they would lower the obligations of their accounts. That would potentially show a surplus, if they were to do that.”

The fall economic statement also noted the government would be moving forward with its commitment to re-establish lifelong pensions as an option for ill and injured veterans.

This article was originally published in our sister publication, Benefits Canada 

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