CIA Annual Meeting Assemblée annuelle de l’ICA June 29 & 30, 2006  Les 29 et 30 juin 2006 Ottawa, Ontario CIA Annual Meeting  Assemblée annuelle de l’ICA

PEN 3 Pension Accounting Convergence and International Standards CIA Annual Meeting  Assemblée annuelle de l’ICA

Today’s Speakers Paul Cherry, FCA Chair, Accounting Standards Board Catherine Robertson, FFA, FCIA Eckler Partners Ltd. Jill Wagman, FSA, FCIA Eckler Partners Ltd. Ellen Whelan, FSA, FCIA Mercer Health & Benefits

Ellen Whelan, FSA, FCIA Mercer Health & Benefits FASB Changes CIA Annual Meeting  Assemblée annuelle de l’ICA

Background FASB takes steps to improve accounting – Two-phase project approved last November Phase 1 focuses on balance-sheet recognition of funded status Phase 2 reconsiders all aspects of pension and other postretirement benefit accounting  Convergence with international standards FASB Changes

FASB Approves Two-Phase Project CIA Annual Meeting  Assemblée annuelle de l’ICA

Phase 1 Key Changes Balance-sheet recognition of funded status (fiscal years ending after Dec 15/06)  No delay for non-public entities Assets and liabilities measured at fiscal year-end (fiscal years beginning after Dec 15/06)  One year delay for non-public entities Footnote disclosures modified consistent with new reporting FASB Changes

CIA Annual Meeting  Assemblée annuelle de l’ICA Phase 1 – Balance Sheet Recognition of Funded Status - Requirements Amounts currently in footnotes move to balance sheet No new actuarial calculations Funded status = market value of assets – PBO / APBO  Combine all overfunded plans and recognize as an asset  Combine all underfunded plans and recognize as a liability  OPEB and pension plans may be combined in balance sheet Balance sheet immediately reflects gains, losses, plan amendments Balance-sheet changes flow through comprehensive income, not P&L Comprehensive income recorded net of tax Remaining initial transition amounts written off to retained earnings and are not included in current year’s expense FASB Changes

CIA Annual Meeting  Assemblée annuelle de l’ICA Phase 1 – Balance Sheet Recognition of Funded Status - Implications Potentially large, volatile reductions in shareholder equity raise concerns for:  Measurements under incentive programs  Loan covenant requirements  Investor reaction  Financial ratios that are critical to employers in certain industries, such as banks and insurance companies  Regulatory limits on return on equity that limit revenue Equity reductions apply to other postretirement plans for the first time Plan design  Full cost of future plan enhancements immediately recognized in balance sheet  Unrecognized prior service costs no longer considered an “intangible asset” reducing the charge to equity Balance-sheet adjustments required regardless of funded status, not just for under-funded plans  No accounting advantage in fully funding ABO FASB Changes

CIA Annual Meeting  Assemblée annuelle de l’ICA Phase 1 – Balance Sheet Recognition of Funded Status - Retrospective Application Revise all prior balance sheets shown in financial statement to reflect funded status of retirement plans Revise earnings and other comprehensive income statements for all periods presented to reflect new approach  Earnings statement changes if net benefit cost included recognition of transition amount (regular amortization, settlement or curtailment) Revise any other summary financials shown Prior interim quarterlies are also revised as appropriate No “cumulative effect” charge to earnings For comparison only – prior statements are not reissued Work can be done now assuming final statement doesn’t change Company will need to figure tax effects FASB Changes

CIA Annual Meeting  Assemblée annuelle de l’ICA Phase 1 – Fiscal Year End Measurement Date - Requirements Transition requires two measurements  At current early measurement date for Prior year-end financial statement Adjustment to retained earnings  At fiscal year-end for net benefit cost for next year Settlement or curtailment between measurements is recognized when it occurs No retrospective application FASB Changes

CIA Annual Meeting  Assemblée annuelle de l’ICA Phase 1 – Fiscal Year End Measurement Date - Implications Can’t finalize budgets until after fiscal year begins Difficulty compiling necessary data to meet SEC deadlines  Discount rate determined with bond model  Value of illiquid assets (real estate, private equity)  Value of foreign plan assets  Retiree medical contributions equal to claims payments  Consolidated results from decentralized operations, especially non-U.S. May need to change processes FASB Changes

CIA Annual Meeting  Assemblée annuelle de l’ICA Phase 1 – Footnote Disclosures Eliminate disclosures that are no longer relevant  Measurement date  Additional minimum liability Reorganize certain information  Eliminate reconciliation of funded status  Repackage gain (loss) and prior service cost (credit) components as reconciliation of OCI Add new disclosure  Amortization payments included in next year’s net benefit cost Implications - Can’t just mark up last year’s footnote FASB Changes (10) (200) (50)100 Net change in other comprehensive income 00New prior service cost 100 Amortization of prior service cost (210)(90)New actuarial gain / (loss) 6090Amortization of (gain) / loss Change in other comprehensive income (before tax effects)

CIA Annual Meeting  Assemblée annuelle de l’ICA Phase 2 Process and Objectives FASB will reconsider all aspects of existing accounting standards for all postretirement benefits Phase 2 subject to progress on other projects currently on FASB’s agenda Project will be undertaken jointly with the IASB Expected to take several years to complete  FASB aims to issue one or more documents for public comment by 2008  No firm indication of when revised U.S. standards may take effect FASB Changes

CIA Annual Meeting  Assemblée annuelle de l’ICA Phase 2 Key Issues FASB will Consider What are the appropriate liability measures?  ABO or PBO for pension plans?  APBO or something else for retiree medical, other postretirement benefits? Should discount rate consider credit rating of the plan sponsor? Should the expense calculation  Use actual return on assets?  Immediately recognize gains and losses?  Immediately recognize plan amendments?  Use different settlement or curtailment rules? How should the various components of expense be classified?  Operating expense  Financing expense How should multiemployer plans be accounted for? FASB Changes

Catherine Robertson, FFA, FCIA Eckler Partners Ltd. International Update CIA Annual Meeting  Assemblée annuelle de l’ICA

Update on International Accounting Standards Board UK Accounting Standards Board International Actuarial Association Pension Accounting – Convergence and International Accounting Standards

CIA Annual Meeting  Assemblée annuelle de l’ICA IASB Goal To develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions. Pension Accounting – Convergence and International Accounting Standards

CIA Annual Meeting  Assemblée annuelle de l’ICA Current reach of International Financial Reporting Standards 99 countries require or allow use of IFRS includes EU, Russia, Australia IASB working with Japan and China to minimize differences FASB and AcSB convergence projects Pension Accounting – Convergence and International Accounting Standards

CIA Annual Meeting  Assemblée annuelle de l’ICA Implications for Canadian Pension Plan Sponsors Canadian companies with subsidiaries or parents in IFRS jurisdictions Canadian companies raising capital in IFRS jurisdictions Investor comparisons Changes to US GAAP Pension Accounting – Convergence and International Accounting Standards

CIA Annual Meeting  Assemblée annuelle de l’ICA Update on IAS 19 Pensions has not been highest priority Project expected to be added to agenda –short term interim standard – long term new standard, likely in conjunction with FASB Pension Accounting – Convergence and International Accounting Standards

CIA Annual Meeting  Assemblée annuelle de l’ICA Update from UK ASB Review on pension accounting – two stage project on improved disclosure – particular consideration to changes in UK legal and regulatory regime – contribute to an internationally accepted standard Pension Accounting – Convergence and International Accounting Standards

CIA Annual Meeting  Assemblée annuelle de l’ICA Exposure Draft Issued May 31, 2006 Replace FRS 17 disclosures with IAS 19 Additional disclosures to address – relationship between entity and trustees – principle assumptions to measure liabilities – sensitivity of liabilities to changes in principal assumptions – how liabilities are measured – future funding requirements – nature and extent of risks arising from assets held Pension Accounting – Convergence and International Accounting Standards

CIA Annual Meeting  Assemblée annuelle de l’ICA Second stage expected to address how relationship between employer and pension plan best reflected in financial statements quantifying the employer’s liability expected return on assets impact on financial reporting of pension regulation Pension Accounting – Convergence and International Accounting Standards

CIA Annual Meeting  Assemblée annuelle de l’ICA Update From International Actuarial Association Comments on practical issues with IAS 19 – discount rate – corridor approach – distinction between DB and DC – treatment of death-in-service benefits – treatment of tax on pension funds Pension Accounting – Convergence and International Accounting Standards

Paul G. Cherry, FCA Chair, Accounting Standards Board Pension Accounting – Convergence and IFRS CIA Annual Meeting  Assemblée annuelle de l’ICA

Current Status: Global Convergence on a Flawed Standard? Basic model is same –Extensive “smoothing” –Extensive use of assumptions –Delayed recognition of gains/losses Corridor approach Economic losses often reported as accounting assets Most important information often buried in footnotes Pension Accounting – Convergence and IFRS

CIA Annual Meeting  Assemblée annuelle de l’ICA FASB Phase I: Worth the Effort? AcSB has already bolstered pension footnote disclosure Impact on debt/equity ratios, debt covenants, etc. “Standards overload” –Any change entails certain costs –Potential adverse impact on other projects Pension Accounting – Convergence and IFRS

CIA Annual Meeting  Assemblée annuelle de l’ICA Phase II Risk of “duelling projects”? –FASB Phase II –IASB comprehensive project This seems contrary to working agreement between FASB/IASB Pension Accounting – Convergence and IFRS

CIA Annual Meeting  Assemblée annuelle de l’ICA Some Canadian Circumstances Regulatory and accounting rules differ for actuarial valuations Uncertainties about ownership of surpluses Frequency of actuarial valuations CRA rules Will greater accounting transparency cause shift to defined contributions plans? Pension Accounting – Convergence and IFRS

CIA Annual Meeting  Assemblée annuelle de l’ICA AcSB Strategic Direction IFRS will be basis of reporting for public companies Transition plan –Transition period approximately 5 years –Implementation plan: available June 30 Avoid new/revised standards during transition that conflict with IFRS Pension Accounting – Convergence and IFRS

CIA Annual Meeting  Assemblée annuelle de l’ICA What Should AcSB Do? Follow FASB Phase I? –Would create conflicts with IAS 19 IASB gives free choice IASB choice also affects net income Adopt IAS 19 “free choice”? Wait for completion of IASB comprehensive project? –Coincides with targeted crossover to IFRS Pension Accounting – Convergence and IFRS

CIA Annual Meeting  Assemblée annuelle de l’ICA Questions

CIA Annual Meeting  Assemblée annuelle de l’ICA Paul Cherry Paul grew up in Saint John, New Brunswick. He holds a Bachelor of Commerce from Queen’s University and received his CA designation in 1974 at which time he became a Member of the Institute of Ontario. In 1991, Paul became a Fellow with the Ontario Institute and in 2000 he became a Fellow with the Institute of Chartered Accountants of New Brunswick. Paul has over 25 years experience in public accounting. Most of that time was spent in Toronto but since 1990 a large portion of his work involved international companies and international accounting standards. He has served as Chief Accountant of the Ontario Securities Commission, Senior Technical Partner of PricewaterhouseCoopers in Canada and Director of National Accounting and Auditing Services of Coopers & Lybrand, Canada. Paul also served as a Canadian Representative on the International Accounting Standards Committee which is based in London, England and chaired the IASC Standing Interpretations Committee from Paul is also a former member and chair of the Canadian Emerging Issues Committee. He was appointed chair of the Accounting Standards Board in May This is a full-time, paid position. The Accounting Standards Board is responsible for establishing the basis on which financial reports are prepared by all profit-oriented businesses in Canada as well as non-profit organizations such as hospitals, museums and universities.

CIA Annual Meeting  Assemblée annuelle de l’ICA Ellen Whelan Ellen Whelan is a Principal in the Health and Benefits practice in the Toronto office of Mercer Human Resource Consulting. Prior to joining Mercer in 1995, Ellen worked in the Actuarial Services Branch of the Workers’ Compensation Board of Ontario for four years. Ellen consults to both private and public-sector clients in the areas of group benefits and workers’ compensation. In particular, she specializes in the valuation of non-pension, post retirement and post employment benefits, sick leave gratuity plans, self-insured workers’ compensation benefits, and other employee group benefits. Ellen just ended a term as the Chair of the Canadian Institute of Actuaries committee that has finalized the Standards of Practice for Post-Employment Valuations. Ellen holds a Bachelor of Science degree in Actuarial Science and Statistics from the University of Toronto. She is a Fellow of the Society of Actuaries and a Fellow of the Canadian Institute of Actuaries.

CIA Annual Meeting  Assemblée annuelle de l’ICA Catherine Robertson Catherine is a pension consultant in the Toronto office of Eckler Partners Ltd. Prior to joining Eckler Partners in 2002, Catherine worked for a major life insurance company in the United Kingdom. Catherine consults to both corporate and non-profit organizations on their pension and benefits plans. She specializes in pension plan design and funding, post-retirement benefit accounting and administration. She also assists with union negotiations and executive benefits. She currently serves as a member of the CIA's Committee on Rules of Professional Conduct. Catherine graduated from the University of Glasgow in 1994 with an Honours Bachelor of Science degree in Mathematics. She is a Fellow of the Faculty of Actuaries (Scotland) and a Fellow of the Canadian Institute of Actuaries.

CIA Annual Meeting  Assemblée annuelle de l’ICA Jill Wagman Jill is a Partner of Eckler Partners Ltd. and acts as the Toronto office pension practice leader. A Fellow of the Society of Actuaries and the Canadian Institute of Actuaries, Jill has served on the CIA’s Workers’ Compensation Committee for five years, acting as Chair for the years 2000 through 2002 and has served on a number of other committees, including a term as Chair of the CIA’s Workers’ Compensation Committee from January 2000 to June 2002, and as a member of the CICA’s Employee Future Benefits Implementation Guide Working Group, as a representative of the CIA. She presently serves as a member of the Committee on International Relations and acts as the CIA liaison to the International Actuarial Association Committee on Pensions and Employee Benefits. Jill also serves as the Chair of the Task Force on International Pension and Employee Benefits Standards. Jill graduated with distinction from the University of Waterloo with an Honours Bachelor of Mathematics degree in 1990 and qualified as a Fellow of the Society of Actuaries and as a Fellow of the Canadian Institute of Actuaries in 1994.