Semester 2 Week 4 PP (Integrated reporting and pensions)

Question 1

What are the two types of pensions?

Answer 1

There are two main types of pension:

Defined contribution
And
Defined Benefit.

Question 2

What is defined contribution?

Answer 2

In a defined contribution pension you and your employer pay in a certain amount each month/quarter etc.
The money is then paid into a fund run by a pension provider. For example Scottish Widows, Standard Life or Aegon.
This is your pension “pot” it belongs to you, and is your property. This pension pot will be invested by the pension provider into stocks, shares etc. Hopefully this will grow.
At retirement this pension pot will be used to fund your pension.
Defined contribution means that your employer has agreed to pay in this certain amount each month.
If they do, then their obligations are met.

Question 3

How do you account for the defined contribution schemes?

Answer 3

Accounting for defined contribution schemes (by the entity) if fairly simple.
The company will collect employee contributions from wages.
It will then pay over employee contributions and its (employer) contributions over the next month.
Employer contributions are a cost over and above gross wages.
Employee contributions are deducted from gross wages.

Question 4

Dalkieth Ltd. Have a defined contribution pension scheme for their staff.
For the month of October 20X4 gross wages were £4,400,000. Related to this employer’s NI was £400,000, employee’s NI was £380,000 and PAYE was £920,000.
Dalkieth made contributions of £250,000 to the employee’s pension funds. In the same month the employee’s made contributions of £420,000.
Prepare the journals for the payment of wages in October 20X4 and the payment of creditor’s the following month.

Answer 4

Prepare journal

Dr wages and salaries (P/L) 5,050,000
Cr HMRC payable 1,700,000
Cr Pension creditor 670,000
Cr Bank 2,680,000
Being wages for October

The following month the payment will be made to HMRC and the pension creditor by the following journal.

Dr HMRC payable 1,700,000
Dr Pension creditor 670,000
Cr bank 2,370,000
Being payment to HMRC and pension creditor

Question 5

What is a defined benefit pension?

Answer 5

Under a defined benefit pension scheme the company guarantees the employees a certain pension when they retire.
This is usually but not always based on the employee’s final salary. As such they are often called final salary schemes. This therefore means the company holds a pension liability as the company is ultimately responsibility for ensuring that these pensions get paid.
In line with the accruals and prudence principles the company must therefore recognise this liability.

Question 6

Bernard Ltd. runs a defined benefit pension scheme for its employees.
For every year the employees work they will receive 1/80th of their final salary as a pension (up to a maximum of 40 years).

What would you receive as your pension?

Answer 6

So if you retired after 40 years you would receive 40/80 or half your final salary as a pension.

Question 7

How do you calculate the liability of pensions?

Answer 7

This therefore means the company holds a pension liability as the company is ultimately responsibility for ensuring that these pensions get paid.
In line with the accruals and prudence principles the company must therefore recognise this liability.

Question 8

What is the treatment of defined benefits and what are net assets/liabilities?

Answer 8

The pension asset and liability should be updated and revalued each year.
The applicable accounting standards require the pension asset and pension liability to be offset.
There will therefore be a net pension asset or net pension liability.

A net pension asset means that the amount invested by the company in the pension scheme exceeds the expected liabilities (the amount they expect to pay out)
A net pension liability means that the amount that the company expects to pay out exceeds the amount invested.