Defined Benefit Plan How to treat deferred backfill by employer.

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cspwcspw
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Defined Benefit Plan How to treat deferred backfill by employer.

Post by cspwcspw »

Hi. I am a Pensioner on a Defined Benefit Plan (in South Africa, so I understand things may be a bit different). And,
as a disclaimer, I'm not financially trained, so I apologize if I get things wildly wrong.

The DB plan became underfunded in 2016-2018 statutory reporting period, and the Employer agreed to pay over to the Fund
(a separate legal entity) special additional contributions, payable over 36 months (2020-2022) to backfill the shortfall at the end of 2018.

The Fund Actuary and Trustees refuse to account for the Employer's promise as an accrued asset, so in more recent balance sheets
the fund remains underfunded. They maintain they can only recognize the additional contributions when the cash arrives in the account (cash-basis accounting).

This underfunded situation was used as an excuse not to grant any Pension increases at all in 2020. (Part of our local legislation says Trustees may not grant
any increases that would make the Fund financially unsound.)

Can you give me any IFRS or IAS guidance on accounting treatment of an Employer's promise to pay additional future money? Should the asset be recognized immediately?

Thanks
Peter
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JRSB
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Re: Defined Benefit Plan How to treat deferred backfill by employer.

Post by JRSB »

What exactly happened when they 'agreed' or 'promised' as you say? Presumably you don't know precisely what agreements were made or the terms and conditions.
"I am always ready to learn although I do not always like being taught" - Churchill
pub_acco
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Re: Defined Benefit Plan How to treat deferred backfill by employer.

Post by pub_acco »

IAS 19.114 explicitly says "Plan assets exclude unpaid contributions due from the reporting entity to the fund." Does this apply?
cspwcspw
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Joined: 11 Oct 2020, 11:05

Re: Defined Benefit Plan How to treat deferred backfill by employer.

Post by cspwcspw »

Wow, useful - just the kind of references I seek. Not the answer I'd like, of course. It then shifts my problem to "Why did the Trustees agree to the extremely generous payment plan if during the interim the assets, would be excluded, and impact the ability to award Pension increases". Thanks
cspwcspw
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Joined: 11 Oct 2020, 11:05

Re: Defined Benefit Plan How to treat deferred backfill by employer.

Post by cspwcspw »

JRSB, I have two documents. In the one circular from our Vice-Chancellor (yes, it is a University) they say "we've committed X amount to deal with the situation and provisioned for it in our rolling budgets". Then the Plan itself had to send a formal letter to the Regulator which members have access to. Their letter informed the Regulator how the deficit was to be addressed ("the Employer has agreed to these specific payments"). They also provided an explicit payment schedule.

So, no, I don't know the exact details of the agreements, but I suspect there was some "behind closed doors" conditions that I am not privy to. However, I have formally challenged the decision with the Fund - they meet later this coming week.

In terms of the other feedback in the forum, if they do not reflect the Employer's promise as a Plan asset, they could still appear to be badly underfunded at the end of the next three-year statutory reporting cycle. So they might just shoot themselves in the foot.

Peter
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JRSB
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Re: Defined Benefit Plan How to treat deferred backfill by employer.

Post by JRSB »

IF you're happy it's true then ultimately you'll benefit from the additional contribution, but the fact that they are using the apparently underfunding position to limit further benefits is cheeky - I suppose the question is whether they have complete discretion to not increase payout, or is there some legal requirement that they do so based on the financial health, in which case they are potentially breaking it by 'ignoring' the funding commitment in that assessment?
"I am always ready to learn although I do not always like being taught" - Churchill
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Marek Muc
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Re: Defined Benefit Plan How to treat deferred backfill by employer.

Post by Marek Muc »

for a true defined benefit plan, poor investment returns on plan assets should not impact the level of benefits
cspwcspw
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Joined: 11 Oct 2020, 11:05

Re: Defined Benefit Plan How to treat deferred backfill by employer.

Post by cspwcspw »

Thanks again JSRB. If I was confident that I would ultimately benefit, I could relax more. It's more complicated, in my view. The accrual rate for active (contributing, still working) members versus the contribution rate is unsustainably high in the current economic situation. So it is a kind of "employment perk". Employees have the option to uplift their value at retirement and buy a Pension in the marketplace. In fact, they're being actively encouraged to do so, and the Employer is exploring ways to make this route mandatory. So the fund has been described as "over-generous while you are accruing benefits, not nearly so good when you actually go on Pension". The Fund and Employer's reluctance to right-size the contribution/accrual parameters has led (in my opinion, anyway) to Pensioners cross-subsidizing the active members. In the past four years we have not once had increases that were better than 60% of CPI inflation. And this year, no increase at all, in spite of the backfill. So I don't think the backfill helped Pensioners - it is helping perpetuate the perk for active members :-)
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