PS 3251 may force plan sponsors to rethink risk and funding strategies, says Normandin Beaudry
Canadian public sector organizations are about to face a significant shift in how they report pension and group benefit obligations on their financial statements.
A new accounting standard – PS 3251 – replaces two existing chapters (previously 3250 for pension plans and 3255 for group benefits) and takes effect for financial statements opening on or after April 1, 2029.
The standard, years in the making, introduces a mark-to-market approach that eliminates the deferred recognition of actuarial gains and losses, forcing plan sponsors to reflect in their financial statements the real-time economic position of their plans, explains Louis-Bernard Désilets.
"The most important implication is the greater transparency of real-time changes in plan asset values and benefit obligations," said Désilets, partner, pensions at Normandin Beaudry. "For plan sponsors, this means financial results will track more closely to the true underlying position of their plans and the implications extend beyond accounting,” he added, noting how budgeting, funding strategies, communications with boards and unions, and overall risk management may all be influenced by this change.
“It also places a greater emphasis on understanding the plan's funded status and the sources of volatility, so leaders can make informed decisions. In some cases, this could prompt strategic actions such as adjusting investment policies or pursuing de-risking strategies to better align assets with obligations,” Désilets added.
The new framework requires to use professional judgement when sponsors decide whether a plan is fully funded or underfunded. That determination isn’t a formality as it directly affects the discount rate used in the valuation, explained Désilets.
For fully funded plans, the rate remains tied to expected asset returns, in line with current practice. But for underfunded plans, sponsors would need to use a market-based rate drawn from government bonds, high-quality corporate bonds, or another instrument that best reflects the time value of money.
Désilets underscores that sponsors will have to document their work, which means setting out the evidence behind the funding assessment, including core factors like legislative or contractual funding requirements and the results of the latest funding valuation, along with secondary indicators like the plan’s history of dealing with deficits and the organization’s demonstrated commitment to keeping the plan adequately funded.
In practice, he suggests this could be captured in a short internal memo that explains the evidence, assumptions, and reasoning behind the conclusion reached, while also noting any new information that emerged after the valuation date. The point is to make the determination objective, defensible, and consistent yearly.
Marie‑Hélène Brassard, senior principal of health and benefits at Normandin Beaudry, believes the biggest implementation hurdle for employers in multi-employer plans will be figuring out whether enough information exists to apply defined benefit accounting in the first place, particularly as several of these plans were never built to track obligations at the level of an individual employer, which means sponsors may have to work closely with plan administrators to determine what data can realistically be produced.
She also points to the documentation burden, noting that employers will need to clearly explain why the necessary information is - or isn’t - available since the new standard requires that rationale to be disclosed.
That, in turn, will force closer coordination among participating employers, plan administrators, actuaries, and auditors to avoid last-minute problems.
Désilets believes PS 3251 will make balance-sheet volatility harder to ignore because actuarial gains and losses, and changes in the fair value of plan assets will be recognized immediately rather than deferred or smoothed over time. As a result, shifts in markets, plan experience, and changes in actuarial assumptions will show up more directly in reported results.
He acknowledged these remeasurements don’t flow through annual surplus or deficit in the statement of operations, but they do change the net financial assets or liabilities reported on the statement of financial position. Over time, however, some of that movement may even out as assumptions are revised.
“Sponsors should prepare their boards and other stakeholders for more visible year to year volatility in reported net financial assets or liabilities,” said Désilets. “How much more volatility ultimately depends on the characteristics of their plan, particularly the asset mix, the funding strategies and sensitivity to interest rate movements and market conditions. For example, plans with higher exposure to equities or long duration liabilities will generally experience more pronounced swings than those with more conservative investment strategies or shorter-term obligations.”
Brassard highlighted the biggest valuation shifts for non-pension post-employment benefits will come from two sources. The first, and more significant, is the discount rate. Notably, retiree health, dental, and life insurance plans are almost always unfunded, and under PS 3251, they must now be valued using market-based rates rather than the more stable rates sponsors have relied on until now.
That change will push liabilities up if the discount rate is lowered and introduce new volatility into the defined benefit obligation.
The second pressure point is the measurement framework itself.
“Depending on the life and health insurance plan, we may see changes in service costs and defined benefit obligation because of the difference in how benefits are attributed to periods of service. For some plans it may be a decrease in the benefit obligation and for some others, it may be an increase. It will depend on the design of each plan," she said.
While sponsors still have several years to plan for the changes, the first organizations to feel the impact are likely to be those with large defined benefit exposures, especially municipalities, broader public sector bodies with legacy pension plans, and some crown corporations.
Additionally, organizations participating in multi-employer plans could run into administrative pressure early, because the standard requires them to determine whether enough information is available to apply defined benefit accounting
Still, sponsors would do well not to wait until 2029 to start preparing. Early action means conducting an initial impact assessment to understand how benefit obligations, disclosures, and processes will change, while also reviewing assumptions, funding policies, and governance documentation to make sure they hold up under the new funding status assessment, noted Brassard.
She also noted actuaries and auditors should be brought in early to align on methodologies, particularly around discount rate selection and sponsors also need to gauge whether their defined benefit liability will jump at transition due to the elimination of unamortized actuarial gains. They should also be communicating with boards, unions, and other stakeholders well ahead of time.
"It's an accounting update, but it will influence decision making, budget planning, and long-term financial sustainability," she said. “Even though the standards apply in 2029, early planning will help sponsors avoid surprises and a ensure smooth transition when the new requirements take effect.”
