Public sector pensions have been in the spotlight recently for two reasons. First, users have difficulty understanding what the liability represents and, secondly, because changes are being made to the plans themselves given questions about their ongoing affordability. Estimating pension liabilities is complicated because of the long-term nature of the obligations. But estimates are just that, estimates, and they may prove to be different from reality. As governments assess the affordability of their pension liabilities, some have taken the view that plans need to be revised in order to make them sustainable. Questions relating to these changes are arising as to whether a government, for example, has a liability or not. This is a very complicated issue because it is about who bears the risk associated with the benefit obligation.

The Public Sector Accounting Board

The Public Sector Accounting Board (“PSAB”) is an independent board comprised of representatives from all levels of government, private sector auditors, and other interested stakeholders. Board members serve independently from their organizations. While PSAB issues standards on its own authority, it is accountable to the Accounting Standards Oversight Council, ensuring that standards are developed without undue influence and in the public interest. It does this by requiring PSAB to follow an extensive due process.

The Need for Review

In Canada, PSAB is responsible for setting standards for the public sector. Until recently, Canadian governments were among the very few around the world that, for example, recognized a pension liability in their financial statements. The ongoing affordability of a number of public sector pensions is now a key concern because people are living longer than they have in the past and because returns on investments are not what they used to be. Governments are now aware of the escalating costs of these plans and are beginning to review and revise them. Some have created what are called shared-risk or target benefit plans.

“As PSAB begins its process, it is important to hear from all of our stakeholders.”

Here and abroad, standard-setters such as PSAB are updating their accounting requirements in line with the current environment. Recently, the Accounting Standards Board of Canada decided that eliminating the ability to smooth out the effects of changes in estimates would improve understandability, comparability, and transparency. This decision provides a much better measure of the liability, a measure that is not clouded with other gains and losses unrelated to the liability. The International Accounting Standards Board and the U.S. Financial Accounting Standards Board have taken similar approaches.

Recognizing the need for change, PSAB approved a project on pensions at its December meeting. First, the project will address the technical issue of how things such as valuation and actuarial experience gains and losses should be measured and accounted for. Next, it will assess whether these new types of plans fit within the definitions of a defined benefit or contribution.

Call for Input

There are many issues that need to be addressed, and the task is not expected to be easy. Controversy surrounds the volatility that market assessments and experience gains and losses can bring. As PSAB begins its process, it is important to hear from all of our stakeholders. Without the advantage of hearing, PSAB cannot be certain that all views have been heard and deliberated. I would encourage anyone reading this article to contribute by responding to our documents for comment. These documents are posted publicly on our website. 

We look forward to hearing from you.