Defined contribution scheme

A defined contribution scheme confers the right to a pension contribution rather than a fixed pension payment as under a final pay or average pay scheme. Under a defined contribution scheme, the ultimate pension benefits depend on the amount of the contributions and the yield that is achieved. There is no guarantee other than a guaranteed contribution. A defined contribution scheme is common when pension providers are insurance companies.

The annual (gross) premium is determined by multiplying the (maximum) age-dependent … Continue reading

Defined benefit pension – Average pay

In an average pay scheme, pension accumulation occurs for each year of service. The accrual in each particular year is linked to the salary earned in that year. There is no past-service benefits accrual should a salary increase. The yearly accrual equals a percentage of the pensionable base. In the Netherlands, the maximum percentage for tax purposes is 1.875% accrual per year as from 2015. The total accrual is the sum of the annual accrual and in most cases, this … Continue reading

Defined benifit pension – Final pay

In this defined benefit system, the pension is related to final pay. In case of a rise in salary, the entire pension is increased with retroactive effect. The costs of funding additional prior benefits resulting from subsequent increases in salary are known as past-service costs. The yearly accrual equals a percentage of the pensionable base. The maximum percentage for tax purposes is 1.657% accrual a year as from 2015. Final pay schemes have become very rare in … Continue reading

Defined Contribution Pension Plans

In a defined contribution (DC) pension plan, workers accrue funds in individual accounts administered by the plan sponsor. The contributions of employees are typically deducted directly from their pay and frequently some portion of these contributions is matched by the employer. Since contributions to DC plans are generally a fixed percentage of earnings, DC assets build at a fairly steady rate over time (abstracting from the time-pattern of investment returns) – avoiding the backloading of accrued benefits that is Continue reading

Defined Benefit Pension Plans

IFRS Definition: Post-employment benefit plans other than defined contribution plans.

In a traditional defined benefit (DB) pension plan, workers accrue a promise of a regular monthly payment from the date of their retirement until their death, or, in some cases, until the death of their spouse. The promised life annuity (deferred) is commonly based on a formula linked to an employee’s wages or salary and years of tenure at the sponsoring firm. In a typical DB plan the member Continue reading

Interaction Defined Benefit Asset and Minimum Funding Requirements

Illustrative examples

These examples accompany, but are not part of, IFRIC 14.

Example 1 – Effect of the minimum funding requirement when there is an IAS 19 surplus and the minimum funding contributions payable are fully refundable to the entity

IE1 An entity has a funding level on the minimum funding requirement basis (which is measured on a different basis from that required under IAS 19) of 82 per cent in Plan A. Under the minimum funding requirements, Continue reading

What is a correct discount rate in pension calculations?

Some background information on the discussion on pension plans and discount rates. Choosing the correct discount rate in calculation pension liabilities is not an easy task and a task that brings public responsibility.

Interest rates in the European area are close to zero because the ECB holds its benchmark refinancing rate at zero since March 2016, see table below:

Sponsor Accounting for a Pension Asset

A pension asset arises when total contributions by the sponsor of a defined-benefit plan (plus interest income) are greater than all pension expense since the plan’s inception.

For example, a pension plan fund had a net pension asset of $9.312 billion before considering any valuation allowance.

As with any recorded asset (think of accounts receivable, or a building), a pension asset signals that the sponsor can benefit from the asset in the future. However, unlike other types of assets, … Continue reading

Determining annual pension expense

In general terms, pension expense reported in the statement of profit or loss is driven by how much the pension liability increased during the year, net of returns on the plan’s assets. Normally, a pension liability increases as employees earn additional future benefits from an additional year of service, and as they get closer to collecting retirement benefits. These factors also increase the pension expense in the statement of profit or loss.

Plan assets increase with returns that the … Continue reading

Components of a company’s pension liability

A company’s defined-benefit pension plans have three basic components:

Setting aside unamortized actuarial gains and losses, when plan assets are less than the accrued benefit obligation, a net pension liability is recorded on the statement of financial position. A net pension liability is the estimate of the amount needed to pay for pension benefits that … Continue reading