Act respecting municipal pension plans: impact on municipal financial statements
The Act to foster the financial health and sustainability of municipal defined benefit pension plans (2014, chapter 15) (the Act) assented to on December 5, 2014 (tabled as Bill 3 before it was adopted), may have a significant impact on the financial position of many municipal bodies.
Under the Act, these plans must be restructured retroactively to January 1, 2014. Accordingly, major changes will be made to plan funding and the pension obligation calculation, which could affect the measurement and presentation of the retirement benefit expense and liability in the 2014 financial statements of municipal bodies.
Among other things, the Act requires active members and municipal bodies to jointly assume past deficiencies and share equally in post-December 31, 2013 service costs. For plans that meet certain conditions, the provisions will be effective as of the renewal date of the collective agreement or any other agreement related to the plan, unless the parties agree that the provisions become effective on an earlier date. However, all plans will have to suspend automatic pension indexation for active members as of January 1, 2014.
Key provisions of the Act (non-exhaustive summary)
Service subsequent to December 31, 2013:
- Equal sharing of the current service contribution and future deficiencies (municipal body and active members);
- Capping of the current service contribution at 18% of the overall payroll of active members (20% in the case of police officers and firefighters);
- Establishment of a stabilization fund, funded by an additional contribution of at least 10% of the current service contribution;
- Abolition of the automatic pension indexation.
Service prior to January 1, 2014:
- Plan deficiency as at December 31, 2013: distinction made between the deficiency attributable to retired members and to active members;
- the deficiency attributable to retired members is borne by the municipal body, unless the municipal body decides to suspend the pension indexation for retired members as of January 1, 2017, so they can contribute to funding the deficiency (retired members would then assume between 45% and 50% of the deficiency attributable to them);
- the deficiency attributable to active members is shared between the municipal body and active members. The municipal body assumes between 50% and 55% of the deficiency, while active members assume the balance;
- Deficiencies identified in subsequent actuarial valuations are borne by the municipal body;
- Abolition of the automatic pension indexation for active members.
The Ministère des Affaires municipales et de l’Occupation du territoire (MAMOT) has set up an accounting and tax technical working group involving representatives of major cities, municipal associations, the Order’s Working group on municipal governments, as well as actuaries and auditors. MAMOT’s working group intends to agree on the accounting treatment and financial reporting for the various provisions set out in the Act.
MAMOT plans to ensure that the working group meets promptly and conducts the necessary analyses to issue directives in February or early March 2015.
A new article will then be published in the CPA Newsletter, in which we will report on the directives and provide an example of a note to the financial statements on the effects of the Act prepared by the Working group on municipal governments.
In taking account of the directives issued and the information provided by actuaries, preparers of 2014 financial statements and independent auditors will have to exercise professional judgment, especially when it comes to measurement uncertainty and the risks related to legal disputes, to determine whether the 2014 financial statements should immediately reflect the reduction in the retirement benefit liability and expense using best estimates.
Notes to the financial statements will have to inform readers of the effects of the Act, regardless of whether or not they are recognized on the face of the financial statements, and of key assumptions used, if any, in determining the retirement benefit liability and expense. The risk related to legal disputes must also be disclosed as a contingent liability if the effects of the Act are already recognized.
For an outline of the Act’s provisions, consult the summary prepared by actuarial firm Normandin Beaudry [+]
You can also read a summary prepared by the UMQ and Le Carrefour du capital humain [+]
For more details, see the full act [+]
By the working group on municipal governments