Introduction

Pensions have become a considerable economic and political problem. Deficits have risen due to increased longevity, lower interest rates and poor investment performance. Pensions accounting questions arise in two contexts: in relation to the accounts of pension schemes themselves and in relation to the treatment of the cost of pensions in the accounts of the sponsoring companies. It is with the latter question that this chapter is concerned. The current accounting rules are set out in FRS 17 ‘Retirement benefits’ and IAS 19 ‘Employee benefits’.

Defined contribution and defined benefit

Fundamentally, pension schemes take one of two forms.

Defined contribution schemes

A defined contribution (DC) scheme is defined as one ‘into which an employer pays regular contributions fixed as an amount or as a percentage of pay and will have no legal or constructive obligation to pay further contributions if the scheme does not have sufficient assets to pay all employee benefits relating to employee service in the current and prior periods’ (FRS 17, para. 2). So, for example, the employee might pay 5% of pensionable pay into the fund and the employer might pay 8% of pensionable pay. The pension paid to the employee is based solely on the size of the fund into which those contributions have grown. If, say, the investment performance has been poor, and as a result the pension is lower than expected, that is that: there is no obligation on the company to pay additional amounts.