News & Views. Knowledge & Insights. Informing workers about. hazardous products at work. Volume 13 Issue 1 January 2016.

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1 Knowledge & Insights News & Views Volume 13 Issue 1 January 2016 In this issue 1 Informing workers about hazardous products at work 4 Accounting for employee benefits: alternative methods for determining current service cost and interest cost 5 Update: Ontario and New Brunswick amend regulations to adopt new CIA mortality tables 7 Market indices as at December 31, Tracking the funded status of pension plans as at December 31, Impact on pension expense under international accounting as at December 31, 2015 Informing workers about hazardous products at work Hazardous products are used in many different types of businesses and industries. Every day, workers use, handle, transport and store such products. Risk of contact and exposure is undoubtedly greater in industrial workplaces, but such products are also common in most businesses. What do fire extinguishers, chemicals used in photocopiers and industrial kitchen cleaning supplies have in common? They are all hazardous products whose risks are sometimes treated as inconsequential because they are routinely used in familiar environments. Those risks do vary, however, depending on the specific work environment and conditions. To properly protect workers, day-to-day management to prevent occupational injury and disease must provide concrete solutions to such risks. Certain rules have been in place for some time but are now being revised.

2 WHMIS 1988 The Workplace Hazardous Materials Information System (WHMIS) was introduced to identify hazardous products and provide clear information to anyone using such products in the workplace. The WHMIS also ensures that workers and employers are aware of the harmful effects of hazardous materials and know how to prevent them. Its purpose is to reduce the frequency and severity of accidents and occupational diseases caused by exposure to hazardous substances. The original task force set up in 1982 was composed of representatives from unions, employer associations, manufacturers and the Canadian government. Their mandate was to set up a system to provide standardized information on hazardous materials. The WHMIS thus evolved out of the concerns and needs of workers and employers, as well as collaborative effort among the partners. Since 1988, every Canadian company has been required by law to comply with the WHMIS. Until recently, the WHMIS provided three types of information to workers: Labels that concisely describe the main risks and preventive measures Material Safety Data Sheets that detail the characteristics, risks and preventive measures for each specific hazardous product A training and information program set up by the employer to make sure workers are aware of and equipped to deal with the risks of using hazardous materials Canadian legislation (the Hazardous Products Act 1 and its regulations) sets out the obligations of hazardous product suppliers with respect to the specific information that must be provided to the users of such products. To ensure uniform application of the WHMIS across Canada, all the provinces have adopted legislation requiring adherence to the WHMIS, enforced by their regulatory agencies 2, setting out the obligations of employers and workers. The Globally Harmonized System (GHS) and updated WHMIS Development of the Globally Harmonized System of Classification and Labelling of Chemicals (GHS) started at the Earth Summit in Rio Janeiro in 1992 and ended with the international introduction of the GHS in The mandate of the task force composed of representatives from government, industry, unions and other organizations such as the International Labour Organization (ILO) was to establish criteria for classifying and communicating more harmonized information on the physical, toxicological and environmental properties of hazardous chemicals. Canada took part in this process. Until recently, many countries had different systems for classifying hazardous products and conveying information about the risks of using such products. This created problems not only for international trade, but also for the transmission of information about the risks to workers of hazardous products. Because information about the risks was not always standardized and unambiguous, workers who used hazardous products did not always have a clear understanding of the preventive measures required. Also, to market their products in different countries, suppliers had to meet the requirements of several different systems. In February 2015, the federal government amended and updated the legislation and regulations governing the WHMIS so that it now complies with GHS requirements. The federal government s goals in adhering to the GHS are several: Better standardization across all provincially legislated systems Safer international trade More consistent and detailed information about risks for workers and users exposed to hazardous products Safer transportation, handling and use of chemicals More effective intervention when incidents occur 1 Hazardous Products Act, R.S.C. 1985, c. H-3 2 For a list of regulatory agencies in each province: 2

3 Details about the changes The features of the new GHS are thus being introduced to Canada through the Hazardous Products Act and the Hazardous Products Regulations 3 and will gradually replace the old WHMIS. WHMIS 2015 makes significant changes to the earlier version and specifically to the following: Rules for classifying hazardous products Labelling and posting requirements Safety Data Sheet (SDS) format and content (formerly the Material Safety Data Sheet) Content of the training and information program (clarification and updating) Roles and responsibilities of the employer, workers and their representatives regarding the new hazardous products training and information program Some new pictograms to identify certain categories (see table below) Exploding bomb (for explosion or reactivity hazards) Flame (for fire hazards) Flame over circle (for oxidizing hazards) Gas cylinder (for gases under pressure) Biohazardous infectious materials* (for organisms or toxins that can cause diseases in people or animals) Corrosion (for corrosive damage to metals as well as skin, eyes) Environment (may cause damage to the aquatic environment) Exclamation mark (may cause less serious health effects or damage the ozone layer) Health hazard (may cause or suspected of causing serious health effects) Skull and crossbones (can cause death or toxicity with short exposure to small amounts) * Biohazardous infectious materials: an extra pictogram has been adopted in Canada to cover the class of risks related to biohazardous infectious materials. Will employers be ready for the changeover? The new legislative provisions will take effect over a three-year period. In Canada, this means there will be three important dates: June 1, 2017: This deadline is mainly for manufacturers and importers. Hazardous products made in or imported to Canada must be labelled in accordance with the new requirements. June 1, 2018: For suppliers, this date marks the last date they can sell products through distributors with WHMIS 1988 labels and material data safety sheets. December 1, 2018: This third and final date concerns all Canadian employers. By this date, all hazardous products in the workplace should comply with the new regulations. Products must bear the new labels and have Safety Data Sheets that satisfy the requirements of the Hazardous Products Regulation (HPR). During the transition period, the two systems (WHMIS 1988 and WHMIS 2015) will be operating simultaneously. To ensure workers are protected, employers must educate and train them in the new requirements under WHMIS 2015 as the new labels and data safety sheets are introduced into the workplace. The purpose of the transition period is to enable: time for partners and stakeholders to make the necessary legislative, regulatory and system adjustments; old labels and material safety data sheets (MSDS) to be moved out of the supply chain and workplaces in a predictable manner; increased employer and worker awareness and understanding of changes to hazard classification and communication in WHMIS 2015; and, 3 Hazardous Products Regulation, S.O.R./

4 consistency across Canada through coordination and alignment between federal, provincial and territorial jurisdictions. 4 For example, in June 2015 the Quebec government amended the Act respecting Occupational Health and Safety 5 and its regulations to meet the new classification and information requirements. On April 2, 2015, Ontario proposed amendments to its Occupational Health & Safety Act 6 to implement WHMIS If the legislative amendments are adopted, they will be followed by amendments to the WHMIS regulations. 7 The other provinces will soon introduce legislative amendments as well. To ensure a smooth transition It is recommended that employers check the details of each province s legislation and regulations, to ensure their practices comply with the law. In Quebec for instance, an employer must educate workers about WHMIS 2015 as soon as the new safety data sheets and labels are received from suppliers, despite the fact that the final implementation deadline is December 1, To plan for this important transition appropriately, it may make sense to be proactive and check with suppliers to find out when they will be providing the new safety data sheets and labels. Furthermore, has prepared online training sessions on WHMIS 1988 and WHMIS 2015 to provide Quebec employers with information they can share with their employees. The measures taken by the other provinces to comply with the new system and the upcoming amendments to the various legislative and regulatory requirements will be closely monitored. Additional versions of the online training sessions for the other provinces will be made available in Accounting for employee benefits: alternative methods for determining current service cost and interest cost During the past year, major international audit firms have started looking at the possibility of using alternative methods for determining the interest rate used to calculate current service cost and interest on net defined benefit assets (liabilities). While some firms initially seemed to take an unfavourable position on the new methods, recent information leads us to believe that there might be some openness on their part in this respect. Moreover, the Securities Exchange Commission recently indicated that it, too, was open to the use of alternative methods in accounting for employee benefits under Accounting Standards Codification 715 (ASC-715). A new approach for calculating current service cost The current practice used by a large majority of Canadian entities is to apply a single interest rate that reflects the estimated schedule of expected payments associated with the defined benefit obligation, and this is applied to the plan as a whole. Using a single rate should result in a defined benefit obligation equivalent to that determined by discounting the expected payments for each maturity with its corresponding spot rate. This single discount rate is applied both to calculate the obligation and to calculate the current service cost. But the schedule of expected payments associated with the current service cost is usually significantly different from that of the defined benefit obligation, since it does not include any payments to retired members and involves payments that do not depend on accrued years of service. Current practice thus 4 Source: Health Canada (website). 5 In Quebec: Act Respecting Occupational Health and Safety, CQLR, c. S In Ontario: Occupational Health and Safety Act, R.S.O. 1990, c. O.1 7 Source: Ontario, Ministry of Labour (website) 8 Hazardous Products Information Regulation, (S.Q. 2015, c. 13, s. 14), s. 24 and sub-sections (Transitional Provisions section). 4

5 leads to the use of a discount rate that is generally lower than the rate that should be used to calculate the current service cost (due to the shape of the yield curve and the longer duration of the expected payment schedule), generating an increase in the service cost recognized in the income statement, along with an annual and systematic actuarial gain recognized under other comprehensive income. Consequently, this method using the single discount rate determined based on the defined benefit obligation schedule of expected payments to calculate the current service cost results in an approximation that could use some refinement. is of the opinion that an interest rate reflecting the expected payments associated with the current service cost could also be determined and would be different from that determined using the traditional method (i.e., the rate would be higher in the case of a positive yield curve, the same for a flat yield curve, and lower for an inverted yield curve). This method, commonly known as the split discount rate approach, should result in a reduction of the current service cost recognized on the income statement, both for entities using IAS 19 and for those subject to U.S. accounting standards. Calculating interest cost Traditionally, the rate used to determine the defined benefit obligation is also used to calculate interest on net accrued benefit assets. The interest on the current service cost is calculated using the same rate that was used to determine this cost. However, a different methodology could be used: the individual spot rate approach. Under this approach, the present value of the expected payments for each maturity is multiplied by its corresponding spot rate, and the sum of these components constitutes the interest on the obligation, as well as the interest on the current service cost. The combined total interest on the obligation is divided by the total obligation to obtain a single rate. This new approach would effectively reduce the rate used to calculate interest, as compared to the traditional method. Other considerations Based on discussions with certain auditing firms, this change in approach would be considered as a change in accounting estimate, and therefore applied prospectively (which would not require any restatement of previous financial statements). However, since these alternative methods advocate the use of multiple separate rates, it might be necessary to disclose additional information in the financial statements. Update: Ontario and New Brunswick amend regulations to adopt new CIA mortality tables Effective December 10, 2015, Ontario amended the Ontario Pension Benefits Act regulations to require use of the new mortality tables established by the Canadian Institute of Actuaries (CIA). Refer to our News and Views of October 2015 for more details. The new regulations require the use of the new mortality tables for calculating commuted values with respect to: portability on termination of employment; determining Family Law values for members and spouses; plan windup; transfer of assets on the sale or reorganization of a business; transfer of assets from a single employer plan to a jointly sponsored plan; and converting a single employer plan to a jointly sponsored plan. Please note that the previous rules are still applicable in Ontario for the period October 1 to December 9. The plan administrator was not required to use the new mortality table during that period. If the plan administrator wished to use a mortality assumption 5

6 that produces a higher value than the minimum, the plan administrator was required to notify the regulator (assuming the plan document allows the use of a different mortality assumption). New Brunswick Amendment New Brunswick also amended its regulations on November 16, 2015, to require the use of the new mortality table, but retroactive to October 1, 2015, for all calculations. Conclusion As a result of these amendments, all provinces now require the use of the new CIA mortality table. The new tables came into force October 1, 2015, in all provinces except Ontario, where they came into force on December 10,

7 Market indices as at December 31, 2015 The following table shows the monthly summary of returns from various market indices. It also includes returns from benchmark portfolios used by pension funds. FTSE TMX Bond Indices Monthly Quarter to date Returns Year to date 1 year FTSE TMX Canada Universe Bond 1.1% 1.0% 3.5% 3.5% FTSE TMX Canada 91 Day Treasury Bill 0.0% 0.1% 0.6% 0.6% FTSE TMX Canada Short Term Bond 0.5% 0.5% 2.6% 2.6% FTSE TMX Canada Mid Term Bond 1.2% 1.0% 4.9% 4.9% FTSE TMX Canada Long Term Bond 2.0% 1.6% 3.8% 3.8% FTSE TMX Canada High Yield Bond -2.3% -2.5% -3.8% -3.8% FTSE TMX Canada Real Return Bond 1.6% 0.7% 2.8% 2.8% Canadian Equity Indices S&P/TSX Composite (Total Return) -3.1% -1.4% -8.3% -8.3% S&P/TSX Composite Capped -3.1% -1.4% -8.3% -8.3% S&P/TSX 60 (Total Return) -3.1% -1.7% -7.8% -7.8% S&P/TSX Completion -3.0% -0.4% -10.0% -10.0% S&P/TSX Small Cap -1.6% 1.1% -13.3% -13.3% BMO Small Cap Unweighted -1.8% -1.3% -16.6% -16.6% BMO Small Cap Weighted -2.7% 0.2% -13.8% -13.8% U.S. Equity Indices S&P 500 (US$) -1.6% 7.0% 1.4% 1.4% S&P 500 (C$) 2.0% 11.0% 21.0% 21.0% Asset & Risk Management Asset Management We provide objective advice on all aspects of asset management for pension funds, including investment policy statements, portfolio manager searches, investment performance measurement and investment strategy. Risk Management We provide a structured, comprehensive approach to pension risk management, including implementation of liability-driven investment strategies, advice on allocation of the risk budget within an asset-liability framework and execution of continuous and dynamic processes for risk reduction. Contacts Jean Bergeron, FSA, FCIA, CFA Partner Tel.: Fax: jbergeron@morneaushepell.com Robert F. Boston, CFA Partner Tel.: Fax: rboston@morneaushepell.com Foreign Equity Indices 1 MSCI ACWI (C$) 2.4% 8.8% 17.1% 17.1% MSCI World (C$) 2.5% 9.3% 18.9% 18.9% MSCI EAFE (C$) 2.9% 8.5% 19.0% 19.0% MSCI Europe (C$) 1.6% 6.2% 16.5% 16.5% MSCI Pacific (C$) 5.3% 12.9% 23.5% 23.5% MSCI Emerging Markets (C$) 2.0% 4.4% 2.4% 2.4% Other Consumer Price Index (Canada, November 2015) -0.1% 0.0% 2.1% 1.4% Exchange Rate US$/C$ 3.6% 3.7% 19.3% 19.3% Notes: 1 Returns net of taxes on dividends, except for MSCI Emerging Markets. 2 The returns are compounded monthly. Benchmark Portfolios 2 60% Equity/40% Bonds 0.4% 2.7% 3.8% 3.8% 55% Equity/45% Bonds 0.5% 2.6% 3.8% 3.8% 50% Equity/50% Bonds 0.6% 2.5% 3.8% 3.8% 45% Equity/55% Bonds 0.7% 2.3% 3.8% 3.8% 40% Equity/60% Bonds 0.8% 2.2% 3.8% 3.8% 7

8 Tracking the funded status of pension plans as at December 31, 2015 This graph shows the changes in the financial position of a typical defined benefit plan since December 31, For this illustration, assets and liabilities of the plan were each arbitrarily set at $100 million as at December 31, This estimate of the solvency liabilities reflects the new CIA guidance published in November 2015 for valuations effective September 30, 2015 or later. In addition, the solvency liabilities for the month of October were adjusted in order to reflect the new mortality table published by the CIA. The following graph shows the impact of past returns on plan assets and the effect of interest rate changes on solvency liabilities. The evolution of the financial situation of pension plans since December 31, The October change 101 represents approximately 2/3 of the total 2015 change Assets (M$) Liabilities with short duration (8.4 years) Liabilities with average duration (11.0 years) Liabilities with long duration (13.4 years) In December 2015, Canadian bonds and Global equity markets (CAD) showed positive returns, while the Canadian equity market showed negative returns, increasing assets by 0.4%. Annuity purchase rates and the rates used in the calculation of solvency liabilities decreased during the month, increasing the solvency liabilities by 0.9% for the average duration plan. The combined effect decreased slightly the solvency ratio. The table below shows the impact of past returns on plan assets as well as the effect of interest rate changes and mortality change on solvency liabilities, based on the plan s initial solvency ratio as at December 31, Initial solvency ratio as at December 31, 2014 Impact of new mortality in Oct. 2015: If include 80% in transfer values: 4.8% If include 60% in transfer values: 3.6% If include 40% in transfer values: 2.4% Evolution of the solvency ratio as at December 31, 2015 for three different groups of retirees Short duration (8.4 years) Average duration (11.0 years) Long Duration (13.4 years) 100% 94.8% 95.0% 94.6% 90% 85.3% 85.5% 85.1% 80% 75.8% 76.0% 75.7% 70% 66.4% 66.5% 66.2% 60% 56.9% 57.0% 56.8% +3.6% 5.4% deficit Comments 1. No consideration has been made for contributions paid to the plan or for benefits paid out of the plan. 2. Solvency liabilities are projected using the rates prescribed by the Canadian Institute of Actuaries (CIA) for the purpose of determining pension commuted values. 3. This estimate of the solvency reflects the new CIA guidance published January 2015, May 2015, August 2015 and November The underlying typical defined benefit plan is a final average plan with no pension indexing, including active and inactive participants representing 60% and 40% of liabilities, respectively. 5. Assets are shown at full market value. Returns on assets are based on those of the benchmark portfolio (60% equities and 40% fixed income). Since the beginning of the year, driven by positive returns in the Canadian bonds and global equity markets (CAD) the plan s assets increased by 3.8%. The solvency liabilities increased over that same period between 9.3% and 9.7% depending on the duration of the group of retirees. The decrease in the plan s solvency ratio as at December 31, 2015 depends on the plan s initial ratio, but stands between 3.0% and 5.4%. Please contact your consultant for a customized analysis of your pension plan. 8

9 Impact on pension expense under international accounting as at December 31, 2015 Every year, companies must establish an expense for their defined benefit pension plans. The graph shows the expense impact for a typical pension plan that starts the year at an arbitrary value of 100 (expense index). The expense is influenced by changes in the discount rate based on high quality corporate and provincial (adjusted) bonds and the median return of pension fund assets. Expense Index from December 31, Contributory plan Non-contributory plan Comments 1. The expense is established as at December 31, 2014, based on the average financial position of the pension plans used in our 2014 Survey of Economic Assumptions in Accounting for Pensions and Other Post-Retirement Benefits report (i.e. a ratio of assets to obligation value of 95% as at December 31, 2013). 2. The return on assets corresponds to the return on the benchmark portfolio (60% equities and 40% fixed income). 3. The actuarial obligation is that of a final average earnings plan, without indexing (two scenarios: with and without employee contributions The pension expense has increased by 16% (for a contributory plan) since the beginning of the year due to the decrease in discount rate and poor returns (relative to the discount rate). Please contact your consultant for a customized analysis of your pension plan Discount rate (%) Return on assets (60% equities) (%) The table below shows the discount rates for varying durations and the change since the beginning of the year. A plan s duration generally varies between 10 (mature plan) and 20 (young plan). Discount rate Duration December 2014* December 2015 Change in % 3.71% -7 bps % 3.91% -8 bps % 4.04% -11 bps % 4.12% -13 bps * The rates as at December 31, 2014 were revised to reflect a refinement in the methodology used. 9

10 Contributing editors Maryse Desjardins, LL.B. Workplace health and safety Sébastien Rannaud, FSA, FCIA Retirement Consulting Andrew Zur, LL.B. Pension Legislation is the only human resources consulting and technology company that takes an integrative approach to employee assistance, health, benefits and retirement needs. The Company is the leading provider of employee and family assistance programs, as well as the largest administrator of retirement and benefits plans and the largest provider of integrated absence management solutions in Canada. Through health and productivity, administrative, and retirement solutions, helps clients reduce costs, increase employee productivity and improve their competitive position. Established in 1966, serves approximately 20,000 clients, ranging from small businesses to some of the largest corporations and associations in North America. With almost 4,000 employees in offices across North America, provides services to organizations across Canada, in the United States, and around the globe. is a publicly-traded company on the Toronto Stock Exchange (TSX: MSI) 2016 Ltd.