Pensions double entry needed

Gill Gittings

Hello everyone. I have a conundrum that I am hoping you clever lot will help with.

A defined benefit pension scheme shows a surplus of £39 million at start of the year. We know all the costs to P&L are £66 million but the client has been advised to reduce employer contributions to £10m. At the year end the scheme has a surplus of £15million.

How does this double entry work? I'm tied in knots with it!

Thanks in advance

Steve Collings

Your numbers don't make sense!! Is this information correct?

I have quickly worked out how you would get the information in but the figures are generating an actuarial gain which just seems silly. Either the information is incorrect or the actuaries have given duff advice to reduce the contributions. Is this a real life situation??

To get the costs into the P&L, you:

Debit defined benefit pension costs* 66
Credit defined benefit pension asset (66)

* I'm assuming these are the total of current service cost, interest costs and expected return on assets. These need to be analysed into the different components in the P&L.

To get the employer contributions in, you:

Debit pension asset 10
Credit cash at bank (10)

You will then need to work out the actuarial gain / loss in order to get the defined benefit pension asset in the balance sheet to agree to the actuarial valuation. You say that the actuaries have estimated a surplus at the end of the year of £15 million - this is where I am suspecting something is wrong, because this would mean an actuarial gain of some £32 million which I'll explain below.

The movement in the pension asset are as follows:

Opening pension asset b/f.........39
Pension costs to profit/loss......(66)
Contributions paid by e'eer........10
Actuarial gain (balancing fig).... 32
Closing pension asset c/f.........15 million surplus

You can see that without the actuarial gain the surplus would in fact be a deficit of (39 - 66 + 10) = 17 million. The actuaries have advised that the scheme has a surplus of £15 million which means the actuarial gain (which is the balancing figure) is £32 million!! Never in a month of Sundays! Something is definitely not right here! There will always be actuarial gains and losses, but I wouldn't expect to see something has high as £32 million!

Anyway to get the actuarial gain in the books you would debit defined benefit asset and credit pension reserve in the STRGL (actuarial gain).

Hope that helps anyway.

Regards
Steve

Gill Gittings

Thanks Steve. It is and it isn't a real life situation. It's come from a real life client but is for in house training.
You are right, the contributions should be £50 million not £10 million.

Once again thanks for all your help

Steve Collings

Gill Gittings wrote: »

Thanks Steve. It is and it isn't a real life situation. It's come from a real life client but is for in house training.
You are right, the contributions should be £50 million not £10 million.

Aaah, I thought it may have something to do with the contributions paid. Your actuarial gain will now be a loss of £8 million because the surplus was expected to reduce to £23 million from an opening balance of £39, but actuarial valuations show it as £15 million. This is a little bit more realistic! To get the actuarial loss into your books, simply do the entries I've done above, but the other way around, hence:

Debit pension reserve in STRGL £8m
Credit defined benefit pension asset £8m

All the best
Steve

Gill Gittings

Great thanks Steve. So presumably if a pension surplus keep going up because of these gains and losses it will make the company look better. Isn't there a limit as to how much you can put on as an asset?
Sorry for all the questions I just need to understand it properly.

Steve Collings

Gill Gittings wrote: »

Great thanks Steve. So presumably if a pension surplus keep going up because of these gains and losses it will make the company look better. Isn't there a limit as to how much you can put on as an asset?

In your example you haven't got a gain, you've got a loss so the defined benefit pension plan surplus has come down from the prior year value.

I can see what you're saying re pension assets because in some cases a surplus in a scheme might be so large that the scheme is essentially 'self financing' because the return on assets exceeds the total of current service cost and the interest cost on the scheme liabilities. Certainly in such cases (though these are very rare nowadays because the value of pensions is nosediving) if the surplus was recognised in an unrestricted way it could potentially result in an ever-increasing asset, some of which might never be recovered. FRS 17 caps the recognisable asset to the amount of surplus that CAN be recovered which is limited to the amount that the employer can use to generate funds (in other words generate 'future economic benefits' to be technically precise). Economic benefits for an employer usually encompass reduced contributions or a refund.

I think FRS 17 has a harsher test for recognising assets that its international counterpart IAS 19 because under para 58 to IAS 19 (and also para 11 to IFRIC 14) a surplus on a pension asset can only be recognised if the 'future economic benefits' are in the form of reduced contributions to the scheme, or refunds to which the company has an unconditional right. FRS 17 is harsher because as well as refunds being recoverable, refunds also have to be agreed by the pension scheme trustees by the balance sheet date.

Anyhow, hope that helps you understand it better. Pensions are probably one of the most confusing and arduous areas for accountants after deferred tax!!

All the best
Steve