Another pace for DB policies
For companies that report by means of IFRS rules, there is another pace for DB policies regarding the financial cost than for DC policies. The different pace is determined by calculating the factual expenses, or in other words the final pension payments, in proportion to the time of labour. For the determination of the pension payments, an assessment of all future developments is made. This assessment is made on the basis of the financial economic reality on the moment of reporting. Examples of future developments are salary or state-pension offset raises, indexations and resignation.
It is about future pension payments and that is why for the interest, a connection with the financing environment of the company is sought. The applied interest is being deducted from the return on first-rate company obligations. This leads to a pension charges that is higher or lower than the owed premium that is applicable to the current form of financing. Yearly, the actuary makes various calculation for this that have a direct influence on the P&L.
There are many policies for which the obligation of the employer is limited to the paying of the agreed premium. Then, there are no future costs or assets that run from the payment obligation of that year. The owed premium is taken on as a charge in the Profit and Loss Statement. Furthermore, a balance utility forms for the premium that is owed but not yet paid on the balance date.
In general, this also applies to a policy according to the available premium principle (Defined Contribution Plan). But also an average pay plan can, of the employer’s risk on the future costs/assets is eliminated, be classified as a Defined Contribution.
A lot of CFOs are not aware of the possibilities to retrieve a DC qualification for their DB average pay plan. This partly has to do with the fact that the actuarial office, that produces a yearly calculation for IFRS, also is the advisor of the pension plans themselves. This means that factually, there is an opposite interest for these businesses. With the insurance companies where the pension plans were arranged, there is often a lack of knowledge to discuss such matter with you.