IAS 19 — Effect of a potential discount on plan classification

Date recorded:

Effect of a potential discount on plan classification (Agenda Paper 6)


The Committee received a request about whether the existence of the potential discount on a contribution to a post-employment benefit plan will result in a defined benefit plan classification applying IAS 19. In the fact pattern described in the request, an entity sponsors a post-employment benefit plan (the plan) that is administered by a third party. The entity has an obligation to pay a fixed annual contributions to the plan but it will have no legal or constructive obligation to pay further contributions if the plan does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. On the other hand, the entity is entitled to a potential discount on its annual contributions. The discount arises if the ratio of plan assets to plan liabilities exceeds a set level.

Staff analysis

In considering whether the potential discount meets the criterion of "fixed contributions", the staff analyse and consider that the definition of defined contribution plans focuses on the downside risk that the cost to the entity may increase, and the definition does not exclude the upside potential that the cost to the entity may be less than expected. The staff further analyse that the actuarial risk and investment risk do not fall in substance on the entity for this specific facts. Accordingly, the staff conclude that the potential discount does not preclude the defined contribution plan classification.

Staff recommendation

The staff do not recommend to add this matter to the Committee’s standard-setting agenda but publish an agenda decision.


A Committee member expressed concern over the exposure to "downside risk" by the employer, which led to a lively discussion during the meeting. The Committee member thought that the assessment of whether or not the employer is exposed to downside risk requires a broader assessment of the substance of the overall arrangement. The member suggested two scenarios: (a) the contribution level is set at a fixed amount and future refunds are expected—the employer is exposed to downside risk because the amount of the refund is dependent on future actuarial risk and investment return; and (b) the contribution level is set using a benefit formula that relates directly to the future performance of the fund but it is capped based on a certain contribution level. In either scenarios, these plans will normally be classified as defined contribution plans because the employer pays fixed contributions but, the employer in substance bears the actuarial risk and investment risk and as such it shall be a defined benefit plan.

During the discussion, the staff reiterated that the prerequisite for a classification as defined contribution plan is that the employer (i) pays a fixed contribution into a fund and (ii) will have no legal or constructive obligation to pay further contributions (in other words, the employer does not bear any downside risk). One Committee member agreed with that and emphasised that the refund is entirely different from the contribution and, therefore, that part should not be considered when assessing the classification.

As for the proposed Agenda Decision, some Committee members thought that the Agenda Decision should address (i) whether or not the employer bears downside risk in order to describe the substance of the arrangement; and (ii) the meaning of "downside risk", which may be something more than the potential of the need to put more money in the fund.

Some Committee member expressed their concerns that the tentative Agenda Decision considers a very narrow fact pattern and that the particular facts and circumstances in the fact pattern should be included in the Agenda Decision.

The Committee decided, by a majority of votes, to publish a tentative Agenda Decision.

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