Colin Mills, Senior Audit Manager considers Accounting for Pensions under the Accounting Standard FRS102.
Defined contribution pensions schemes
This is the easy one! For defined contribution schemes, employer contributions are accounted for in the profit and loss account in the period to which they relate, with a creditor if the contributions for the last month of the year have not been paid by the year-end.
Defined benefit schemes
This is where it starts to get complicated. During the year there will be monthly employer contributions which will get posted to expenses. However, there may need to be year-end accounting adjustments depending on the type of pension scheme:
Multi-employer defined benefit scheme where insufficient information is available to use defined benefit scheme accounting
Routine contributions are accounted for in the profit and loss account in the year in which they relate. However, if there is an arrangement to pay deficit reduction contributions then a provision needs to be made for the net present value of the deficit reduction contributions. Each year this will need to be reworked with the unwinding of the discount being presented as a finance charge within expenditure and the other movements in the provision being part of pension costs within expenditure.
If the deficit reduction contribution is a fixed amount per month/year future contributions are easy to calculate and it could be that the pension scheme can provide you with this information. However, if the contribution rate has been increased by a percentage for deficit reduction contributions, then it is more difficult to calculate/estimate the amount of future deficit recovery contributions. The discount rate for the provision will also need to be considered.
How do you know if there is insufficient information available to use defined benefit scheme accounting in a multi-employer define benefit scheme?
This will need to be checked with the pension scheme and/or the scheme actuary. Often if there is a set percentage rate across all employers then there may be insufficient information. Alternatively, if the scheme has different contribution rates for each employer it is likely that there is sufficient information to use defined benefit scheme accounting.
All other defined benefit schemes
For all other defined benefit pension schemes, a provision should be included when the fair value of the scheme liabilities is more than the fair value of the scheme assets. The Scheme actuary will need to calculate this figure at the year-end and provide you with this information. For the movement in the provision part will be an adjustment to pension costs (part of the overall costs of funding the scheme) within expenditure and part will be presented within other comprehensive income. The actuarial report should identify this split as well.
Unlike many of the fair value principles in accounting standard FRS102, whilst a provision is always included if the value of the scheme liabilities exceeds the scheme assets, if the fair value of the scheme assets exceeds the fair value if the scheme liabilities (scheme in surplus) an asset is recognised only to the extent that the employer is able to recover the surplus either through reduced contributions in the future or through refunds from the plan. If this is not the case, the no asset will be recognised.
Scheme assets (mostly investments) fluctuate with market movements and scheme liabilities, which are discounted estimates of future pensions due, are subject to changes in discount rate and inflation assumptions on future pensions. The difference between scheme assets and scheme liabilities is therefore volatile from one year to the next, impacting on the employer’s financial statements.
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