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IAS 19 Employee Benefits: Distinguishing between Defined Benefit and Defined Contribution Plans (Hybrid Plans)

Go To List of IFRIC Issues Issue Description: In the course of analysing the comments received on IFRIC D9 Employee Benefits with a Promised Return on Contribution or Notional Contributions, staff noted that some confusion existed amongst constituents as to the appropriate distinction between defined benefit and defined contribution plans. This confusion was brought to the attention of the IFRIC at its April meeting, where the IFRIC agreed that staff should consider the development of appropriate guidance on distinguishing between the two types of plan, for possible inclusion in the finalised version of D9. Discussion at the June 2005 IFRIC Meeting Staff prepared the following proposed guidance: The distinction between a defined contribution and defined benefit arrangement lies in whether or not the employer has an obligation in respect of future risks attached to the benefits earned as at the balance sheet date. In order to determine whether such an obligation exists, one should make reference to the following three conditions: Condition 1: the employee stays in employment; Condition 2: retains plan membership Condition 3: stops accruing future benefits in the plan If the employer has no obligation in respect of future risks in respect of the earned benefit when the three conditions apply, then the plan is a defined contribution plan. Otherwise, it is defined benefit. (Extract from paragraph 3.46 of Observer Paper, Agenda Item 10) The IFRIC noted that the third criteria should refer to accruing service related benefits. That is, in some circumstances, an employee might reach the maximum pensionable service period (such as 25 years) but might still accrue additional benefits in the form of adjustment of the pension related to adjustments to that employee's salary. In such a case the plan would be a defined benefit scheme. The IFRIC discussed briefly various types of plans such as career average salary plans and current salary plans, and whether plans which are economically the same should be accounted for differently. Staff briefly explained the economic differences in the various types of plan. The IFRIC discussed whether the existence of a compulsory benefit resulted in automatic classification as a defined benefit scheme. The IFRIC agreed that such classification would not be automatic. The IFRIC discussed some proposed wording on the impact of materiality. They agreed that it is inappropriate to describe a defined contribution scheme as having an immaterial defined benefit element, rather the analysis should be that there are two separate schemes, and the defined benefit scheme is not material. In addition the IFRIC considered whether an unfunded scheme should automatically be classified as defined benefit, and noted this would have possible implications for year-end accruals. The IFRIC agreed that guidance on the difference between defined benefit and defined contribution plans should not be included in the final interpretation resulting from D9. The IFRIC agreed to address this as a separate project and to consider a project plan for this project out of session. The IFRIC agreed that the three conditions proposed by staff were a step in the right direction, and further debate is necessary. Furthermore, consideration of the following issues would be required: Whether the existence of a compulsory benefit automatically results in classification as a defined benefit scheme; Worked examples explaining average salary plans; Appropriate discussion of the impact of materiality on classification; Whether an unfunded plan is automatically considered defined benefit; and The interaction of the defined benefit/defined contribution distinction with insured benefits. July 2004: IFRIC D9 Issued On 8 July 2004, the IFRIC issued for comment Draft Interpretation D9 Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions . Decision at IFRIC's November 2006 Meeting The IFRIC agreed to remove D9 from its agenda, provided it had the option to restart the project should developments in the IASB's project on post-retirement benefits make it necessary or appropriate. With respect to the distinction between defined benefit and defined contribution plans, the IFRIC decided to split the project into two parts. The part dealing with the distinction of defined benefit plans and defined contribution plans should stay in group 4 and be addressed by the IASB. The other part, addressing how to determine the allocation of future salary increases in the measurement of the present value of the defined benefit obligation, should be developed further by the staff and submitted to the Agenda Committee and the IFRIC as a potential agenda item.