Employee benefits (pensions)

Transcription

1 Employee benefits (pensions) Issues paper presented at the EPSAS WG Meeting Rome, November 2016 The better the question. The better the answer. The better the world works.

2 Contents Introduction Objectives of the Issue Paper Background Methodology Findings regarding recognition and measurement of employee benefits IPSAS EAR ESA 2010 Identified approaches in practice Discussion matters Page November 2016 Issues Paper on Employee Benefits

3 Introduction Methodology Findings Discussion matters Page November 2016Issues Paper on Employee Benefits

4 Introduction Objectives of the Issues Paper Aim of the Issue Paper: Developing an analysis of the accounting treatment of employee benefits (pensions) with a view to financial reporting requirements under the future EPSAS Issues addressed in the paper: Main types of pension schemes in Europe Approaches taken in international frameworks (IPSAS, EAR, IFRS, ESA 2010) Approaches taken in national frameworks (Finland, France, Germany) Problematic points/issues with regards to recognition and measurement Treatment of these problematic points/issues under IPSAS and need for supplementary guidance Advantages and disadvantages of existing widely used approaches Consequences for a possibly convergence between EPSAS and ESA Way forward on pensions Implications for other employee benefits and social benefits Page November 2016 Issues Paper on Employee Benefits

5 Introduction Background Mar 2013: Commission Staff Working Document Determination of the appropriate discount rate seen as a major difficulty when accounting for pension obligations Aug 2014: PwC Report Accounting area employee benefits has lowest accounting maturity (25%) across EU Most governments do not recognise pension liabilities in their balance sheets Source: PwC (2014), p.108 Page November 2016 Issues Paper on Employee Benefits

6 Introduction Methodology Findings Discussion matters Page November 2016Issues Paper on Employee Benefits

7 Methodology Provided an overview on the main types of pension schemes (and especially for general government employees) used in the EU Member States based on a literature review Described the current accounting guidance on accounting for employee benefits/ pension schemes (IPSAS, EAR, IFRS, ESA 2010) Analysed national public sector accounting frameworks, i.e. Finland, France and Germany based on an analysis of legal requirements, financial statements as well as secondary literature Page November 2016 Issues Paper on Employee Benefits

8 Introduction Methodology Findings Discussion matters Page November 2016Issues Paper on Employee Benefits

9 Recognition and measurement of pensions IPSAS 25/39 Applicable IPSASs Classification of pension schemes IPSAS currently applicable: IPSAS 25, Employee benefits As of January 2018, the new IPSAS 39, Employee benefits, will replace IPSAS 25 Therefore, the analysis has mainly been based on the new IPSAS 39 IPSAS 39 identifies three main types of pension schemes: Defined benefit (DB) plans Defined contribution (DC) plans Hybrid (H) plans For the purposes of accounting, each scheme must be classified as either a DB or a DC Accounting treatment of pension schemes: DC schemes IPSAS 39 Defined contribution (DC) Recognition Recognize contributions due as payables No other liability to be recognised Measurement Measured at the amount of the contribution due DB H DC Chart: Possible classifications of pension schemes Page November 2016 Issues Paper on Employee Benefits

10 Recognition and measurement of pensions IPSAS 39 Accounting treatment of pension schemes: DB schemes IPSAS 39 Defined benefit (DB) Recognition Recognize the net defined benefit liability (NDBL) in the balance sheet: NDBL = DBO any plan assets Measurement Actuarial valuation of the Defined Benefit Obligation (DBO) based on Projected Unit Credit Method (PUC method) Actuarial assumptions include: Demographic (mortality, ) and financial (discount rate, indexation, ) assumptions Actuarial gains and losses recorded in net assets/equity Current service cost is composed of: Performance component (payroll expenses in IS) Timing component (interest expense in IS) Any plan assets are measured at fair value, with any interest recorded according to the net interest approach Page November 2016 Issues Paper on Employee Benefits

11 Recognition and measurement of pensions European Union Accounting Rules (EAR) Applicable EAR: EAR 12 employee benefits EAR 12 is in line with the currently applicable IPSAS 25 The European Commission is currently identifying the differences between its accounting rule 12 and IPSAS 39 and intends to update EAR 12 so as to align it with the new IPSAS 39. Current accounting requirements of EAR 12 EAR 12 accounting requirements are to a great extent the same as those of IPSAS 25 EAR 12 specifies which of the options available under IPSAS 25 shall be applied in EU annual accounts, i.e.: All actuarial gains and losses shall be recognised immediately in the statement of financial performance Page November 2016 Issues Paper on Employee Benefits

12 Recognition and measurement of pensions ESA 2010 Accounting treatment of pension schemes 1 Social security schemes 2 Usually financed on a pay-as-you-go (PAYG) basis No liabilities recorded in the core accounts Disclosure in supplementary table Employment related schemes: 1 Social security pension schemes Social insurance provided by general government Particpation in social insurance schemes 2 Employment related pension schemes provided either by or on behalf of the employer Pension benefits mainly income in retirement Social assistance Not related to payments of contributions Non-pension benefits e.g. health and unemployement insurance Individual insurance policies independend of government or employer (Source: EY Issue Paper, page 19) Employment-related DB schemes: Employment-related DC schemes: Funded schemes Liabilities are recognised as reserves build up Unfunded schemes No liabilities recorded in core accounts. Only disclosure in supplementary table Similar to IPSAS Recognize contributions due as payables with no additional liability to recognise afterwards Page November 2016 Issues Paper on Employee Benefits

13 Recognition and measurement of pensions Identified approaches in practice (country analysis) Finland (Central government) The Finnish central government applies accruals-based accounting. However: x No liabilities from pension schemes are recognized in the balance sheet Only disclosures in the notes are required Pension obligations are calculated using the long-term projected model (LTP) as prescribed by the Finish Centre for Pensions France (Central government) The French central government applies accruals-based accounting. However: x No liabilities from pension schemes are recognized in the balance sheet Only disclosures in the notes are required, the rationale being that pension obligations are financed on a PAYG basis Pension obligations are calculated according to the Projected Unit Credit Method (PUC method), in accordance with IPSAS 25 Germany (Central government) The German central government follows a cash-based approach (budgetary accounting). However: The central government nevertheless records pension obligations at federal level but only in terms of a non-integrated, supplementary balance sheet Pension liabilities are measured in accordance with an actuarial method, including a discount rate based on yields of listed government securities and other actuarial assumptions Conclusions of the country analysis Finland and France do not recognize pensions liabilities. Germany does recognize pension obligations at federal level but only in terms of a not-integrated supplementary balance sheet Valuation methods differ considerably, of which some are not in compliance with IPSAS Page November 2016 Issues Paper on Employee Benefits

14 Introduction Methodology Findings Discussion matters Page November 2016Issues Paper on Employee Benefits

15 Discussion matters Obstacles for harmonization Diversity in the main features of the pension schemes Complexity in measuring the pension liability Recognition of pension obligations results in a significant increase in liabilities Page November 2016Issues Paper on Employee Benefits

16 Discussion matters Diversity in the main features of the pension schemes Harmonization of accounting for employee benefits for government employees does not envisage to eliminate the diversity in the pension plans, but rather to harmonize the accounting treatment for the important features in the pension schemes. Principle-based accounting concepts are capable of providing reliable and understandable pension accounts despite the diversity in practice As such, IPSAS 25/39 provides a framework that allows comparing the particular risks resulting from pension plans and allows projecting future cash flows. Comparability might also be significantly enhanced by additional disclosure information. Page November 2016 Issues Paper on Employee Benefits

17 Discussion matters Complexity in measuring the pension liability The one and only measurement concept for pension liabilities does not exist. Pension liabilities are in fact already measured every year in many countries. It is important to ensure consistent measurement concepts and sufficient disclosure information with respect to the assumptions (e.g. the discount rate) applied. Discussion matters: 1) Fluctuation from remeasurement of pension liabilities and assets 2) Determination of the discount rate 3) Approaches regarding the net interest method Page November 2016 Issues Paper on Employee Benefits

18 Discussion matters Recognition of pension obligations results in a significant increase in liabilities The pension obligations in the MS that are subject to recognition are significant. There is more than one way how (full) recognition might be achieved Accounting approaches for recognition of pension obligations at first-time adoption: 1) IPSAS 33 2) Fresh start accounting 3) Virtual pension assets 4) Recognition based on funding Please note that options 2 to 4 are not in compliance with IPSAS. Page November 2016 Issues Paper on Employee Benefits

19 Discussion matters: Summary The following discussion matters were raised in this paper: Diversity in the main features of pension schemes Measurement of pension benefits Recognition of pension benefits An estimate of the effects from the envisaged future accounting concept is important Any other issues not raised in the issues paper? Page November 2016 Issues Paper on Employee Benefits

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