15 May 2019

EFRAG's Discussion Paper – Accounting for Pension Plans with an Asset-Return Promise

The Discussion Paper published by EFRAG explores alternative accounting treatments for post-retirement employee benefits, promising the higher of the return on an identified item or group of items and a minimum guaranteed return.

One of the main perceived issues with accounting for the plans in the scope in accordance with the requirements in IAS 19 Employee Benefits is that measurements of the pension obligation and the plan assets do not reflect the economic covariances between the two following from the terms of the plans. One of the reasons is that the final entitlement benefits are projected with the expected returns on plan assets, while the pension obligation needs to be discounted using a high-quality corporate bond rate. Accordingly, when the expected return on the plan assets is higher than the discount rate, a net pension liability needs to be recognised, even if it is expected that the plan assets will be sufficient to fully settle the pension obligation at retirement.

​The Discussion Paper considers the following three alternatives for accounting for the plans in the scope of the project:
a) A Capped Asset Return approach;
b) A Fair-Value Based approach; and
c) A Fulfilment Value approach.

Under all the approaches, the plan assets are measured at fair value in accordance with IAS 19. The Discussion Paper only explores alternatives in measuring the pension obligation.

The effects of the three alternatives are illustrated with a numerical example. In the example, the beneficiary receives the contributions made to a pension scheme and the asset-return promise. Each year the employer makes a contribution depending on the employee’s salary and years working for the entity. The employee can make additional contributions, which are matched, until a given level, by the employer. The detailed terms of the plan result in it having to be accounted for in accordance with the requirements for defined benefit plans in IAS 19.

Comments on the DP are requested by 15 November 2019.​

Full press release

Full discussion paper

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