Geneve Ltd. (GL) is a manufacturer of personal and commercial transportation solutions, including train engines and train cars. The company is one of the largest private companies in Canada and complies with ASPE. GL must comply with total-debt-to-equity covenants for long-term debt arrangements, and there is an additional covenant on the maximum level of common share dividends.

Both the audit committee and the risk management committee of the board of directors have pensions on the agenda. The head of the risk committee made the following comment to you: “I just don’t understand what is happening. Why did our pension costs increase 246% since 20X3? At this rate, the plan is going to bankrupt us. We have almost the same employee base and our total annual salaries are similar. Is this an error?”
You are an analyst in the financial reporting area, and you have been asked to prepare a report that addresses the questions raised regarding GL’s pension plan. The firm’s actuary has also provided you with some proposed changes to the plan (Exhibit 1). The report should include an explanation of your changes and any related concerns. You should also provide an explanation relating to the increase in the pension expense using the information provided in Exhibit 2 and 3.

The discount rate used for the interest calculation each year are as follows:

Required:
Prepare the report.

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EXHIBIT 1 ACTUARY'S SUGGESTED CHANGES TO PLAN The risk management committee has been monitoring the ongoing risk to GL of sponsoring this defined benefit plan. In discussion with the firm's actuaries, these alternatives have been presented: Settlement of existing defined benefit plan Preliminary negotiations indicate that workers might be offered existing assets, plus $210 million, rolled to a separate trust in relation to existing claims. Defined contribution plan A switch to a defined contribution plan would result in payments totalling 130% of the $45 million amount now contributed to the plan. Additional funding of $100 million per year, designed to address the underfunded status, would be eliminated. Shared risk plan The benefits specified in the plan are amended such that the funding shortfall no longer falls on Geneve alone. Benefits would remain similar to those in the current plan; however, funding the shortfall would change. The proposed change would result in an immediate cost of $150 million. After that, the funding would change, such that GL would contribute 6% of employees gross salaries, employees would contribute 3%. Salary expense for 20X5 was $543 million. Any further funding shortfalls would be equally shared between the employees and GL in the following order: 1. Increase in contributions-Both employees and GL would increase annual contributions to the plan to cover the shortfall. Additional funding contributions can be set to a maximum of 4% deducted from the employees gross pay. GL will match the contributions. 2. Decrease in benefits-Benefits payments guaranteed under the plan are reduced in specified increments. Given the change to the structure, and the fact that GL's funding of the plan is capped as noted above, the risk committee has proposed that this plan be classified as a defined contribution plan.