Cash balance and similar plans — Definitions of defined promises

At the July meeting the Board discussed the definitions for three categories of benefit promises - defined benefit (DB), defined contribution (DC) and defined return (DR). The Board suggested some changes to the proposed definitions. In particular, the Board noted that DC promises are a subset of DR promises and asked whether these two categories could be combined. Furthermore, one Board member questioned the rationale for using the DB category as the residual category instead of the DR category.

At this meeting, the Board discussed the following three issues: the clarified definition of DR promises, the combination of DC and DR promises and the classification of the residual category.

Clarification of the definition of defined return promises

The objective of the amended definition for DR promises was to clarify the following matters:

• the classification of the post-employment benefit promises is made by reference to the way the benefit is accumulated. The way in which the liability for post-employment benefit promises is settled does not affect the definition.
• the contribution requirement must be independent of future salary increases.
• the benefit promise classification should focus on whether or not it can be expressed independently of future salaries. The same benefit promise may be described as current salary (independent of future salaries) or career average (dependent on future salaries).
• the benefit promises of fixed amounts to be paid at future date are DR.
• the employer's liability for any negative returns on contributions paid is included in the promised return component.
• some benefit promises may include a combination of any two or more types of promised returns.

The proposed amended definition of a DR promise is 'a post-employment benefit accumulated through a contribution amount which, for any given period, can be expressed independently of the salary that will be earned after the end of that period.

For some DR promises the entity may have an obligation for the promised return on the contribution amount. The promised return is a guaranteed fixed return, the change in the value of an asset, or group of assets, the change in value of an index, or any combination of these'.

The above definition for DR leads the Board into a lengthy debate about the characteristics and features of DC, DR and DB plans. The Board was reminded that the objective of DR category was to capture schemes where specified contributions (independent on future salaries) paid by the employer and there is a promised return on assets. The Board finally decided to proceed with the proposed definitions and to clarify in the discussion paper what the Board tried to capture in order to obtain the respondents view on the subject. The Board considered that they have given their 'best shot' on these definitions.

Combining defined contribution and defined return promises

At the July meeting, the Board asked the staff to consider whether DR and DC promises should be combined into one category. The only difference is that, for DC promise, the entity has no further obligation once the contributions are paid, whereas for DR promise, the entity has an obligation for a promised return. Therefore, the DC promises are simply a special case of DR promises.

The Board acknowledged that sometimes it is difficult to distinguish between the two. Some DC promises allow the employer to delay payment of contributions to the plan for a specified period. The employer will have an obligation for the delayed contributions and, possibly, the promised return on those contributions. This could lead to have some promises categorised as DC if the contributions have been paid or DR if they have not yet been paid.

The Board decided to combine DC and DR promises as DR promises. Otherwise, either benefit promises could have their categorisation changed depending on when the employer pays the contributions, or an arbitrary rule that sets the period of time within which the contributions must be paid. Furthermore, the Board acknowledged that in some situations it is difficult to distinguish between DC and DR plans, and therefore if both schemes are captured under the same category, DR, this simplify the issue as the underlying accounting principles would be the same.

The residual category

The Board decided that the residual category should remain DB. The Board noted that there is a residual collection of benefit premises which have not yet been considered (e.g. post-retirement medical plans). Furthermore the scope of this Phase I is limited to the work that can be done in a four year period and any changes should be limited to the troublesome plans that are clearly identified.

Measurement of the liability for defined return promise

Based on previous decisions made by the Board, the staff has identified different approaches for accounting for the contribution requirement and premised return in a DR promise. The staff proposed that the employer's liability should be measured at fair value.

There was some disagreement among the Board members regarding whether or not the proposed measurement should effectively be called fair value. The Board view was that the contribution requirement and the promised return that are being measured are based on the assumption that there is no change in the benefit promise. Therefore, the Board directed the staff to a 'building blocks' approach for the measurement of this DR promise and considered that this should be the basis for the discussion paper. These building blocks should explain the key principles in the measurement of the DR promise.

Measurement of benefits in the payout and deferment phases

In most post-employment benefit arrangements, the promises made to employees could be viewed as having three distinct phases: accumulation phase, deferment phase and payout phase. During the accumulation phase, the measurement of benefits will differ between DR and DB schemes.

A question is whether the measurement should change once we entered into the deferment or payout phase, as this could lead to the recognition of a gain or loss on the plan liabilities on retirement because of the change in measurement attribute. The Board has a lengthy debate on the subject and their preliminary view was that no gain or loss should be recognised once we entered into the deferment or payout phase. This is consistent with the current IAS 19 accounting for DB where PUC method is used during the accumulation and deferment/payout phase. The Board could not really conclude on the subject and therefore decided to bring this back at the next meeting.