IFRIC 14 — Should an entity assume continuation of a minimum funding requirement for contributions relating to future service?

Date recorded:

Should an entity assume continuation of a minimum funding requirement for contributions relating to future service?

The IFRS Interpretations Committee received a request to clarify whether an entity should assume that the minimum funding requirement for contributions relating to future service would continue over the estimated life of the pension plan, when IFRIC 14 is applied.  The Interpretations Committee discussed the issue at its March 2015 meeting and tentatively decided not to add the issue to its agenda on the basis that there was sufficient guidance in existing IFRS requirements.  This session was devoted to discussing the feedback received on the tentative agenda decision, and the wording of the final agenda decision.

Several Committee members noted that they agreed with the direction of the amendments, but highlighted that the funding principles were used to determine the assumptions, but that did not mean that the assumptions did not change, as the assumptions are set to reflect the funding principles. They therefore suggested deleting the added words “including the assumptions” from the sentence “the estimate should not include changes to the funding principles, including the assumptions, to determine contributions for future service” in penultimate paragraph b).  One Committee member also noted that the minimum funding may generate a surplus, and paragraph 21 of IFRIC 14 already noted that in the event of a surplus, this may need to be factored into the assumptions as to what the contributions will be – and noted that eliminating the three words would avoid potential inconsistencies.

Several Committee members also suggested articulating in paragraph d) (circumstances) that it is the funding principles that drive the method and assumptions that would be used to calculate the minimum funding basis, i.e. the method and assumptions do not remain the same if the funding principles determine that they ought to be changed.

Another Committee member also agreed with the previous Committee members and added that he thought those amendments went beyond what the Committee had agreed to when the issue was previously discussed.  He noted that the Committee agreed that it could not be assumed that there will be no contributions after the negotiation period, but there might be situations where there might be a different set of contributions after the negotiation period, and if the assumptions could not be revised, then an entity could not make a change to reflect what it really believed contributions would be after the negotiation period.

A further Committee member shared the concerns expressed by the other Committee members.  He also noted that the issue had been raised in the context of the UK regime, which sets the statutory funding objective then requires the trustees to prepare a statement of funding principles, which placed a responsibility on the trustees to determine and document certain factors of the minimum funding basis; which IFRIC 14 uses to describe the actuarial method and assumptions to be used to work out the surplus or deficit on the minimum funding requirement basis.  He noted that the legislation stated that the statement of funding principles is revised from time to time as necessary, and in that sense, the statement of funding principles and schedule of contributions both get revised from time to time, with the schedule of contributions being revised on a fixed basis, and the schedule of funding principles on an as and when needed basis.  He noted that this led to an issue that he believed the Committee should tackle more explicitly in the agenda decision, noting that this all rested heavily on paragraph 21 of IFRIC 14, which notes that an entity does not assume future changes in the minimum funding basis until they are contractually agreed or substantively enacted, and noted that what the Committee was effectively saying was that those factors of the minimum funding basis that are determined by the trustees are within the scope of that sentence of paragraph 21 – they are equivalent to a statutory or contractual requirement.  He noted that he did not believe this was obvious because the trustees were acting under their own discretion within a legal framework – and noted that if the Committee believed that the statement of funding principles was within the scope of paragraph 21, this should be stated.

The Committee agreed to make amendments to the agenda decision as per the above discussion.

There were concerns expressed about making the fact pattern too UK specific; however, it was observed that there was a clear principle - that if the trustees are required to operate within a set of parameters to determine future contributions it cannot be assumed that the parameters that will require the funding will go away at the end of the current period; the assumptions themselves might be different, but it cannot be assumed that the parameters will go away.   It was agreed to capture this principle without getting mixed up in the details of the particular plan.

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