Introduction

For an organisation which is offering Defined Benefit Pension Plan, one of the most important components is Pension Reporting under IAS 19 (About Employee Benefit). It is not only important for regulatory compliance but also for better financial health of an organisation. However, due to the technical expertise involved in the reporting there are chances of errors.

In this blog, we will learn more about the reasons why your Pension Reporting under IAS 19 may not be correct. We will conclude with a conclusion.

Wrong Interpretation of Pension Scheme Benefits

The most common pitfalls in pension reports is the misinterpretation of pension scheme benefits. Pension schemes can be complex, with various rules governing contributions, accumulation of benefits, acquisition conditions and payment structure. Further interpretation of these differences can result in significant errors in debt valuation.

Why did this happen:

• Lack of understanding of the specific rules of the regime
• Project documents are incomplete or missing.
• Oversight of recent regime changes.

How to avoid this:

• Lead to a complete review of regulations and project changes.
• Engage with trustees and legal advisors to clarify ambiguities.
• Regularly update your understanding of the scheme as it evolves.

Incorrect Allowance for Inflation-Linked Benefits

Inflation-indexed benefits are a defining feature of many defined benefit pension schemes. IAS 19 requires inflation assumptions to be consistent with market data. But errors in the determination or use of these assumptions can distort pension liabilities.

Why did this happen:

• Using unstable or inconsistent inflation data.
• Misunderstanding of how inflation affects benefits (i.e. compounding effect).
• Ignoring specific upper or lower limits for inflation-indexed increases.

How to avoid this:

• Underlying inflation assumptions based on observable market data (such as the rate of return on inflation-indexed securities)
• Use a consistent methodology for inflationary assumptions across reporting periods.
• Consider a sensitivity analysis to evaluate the impact of changes in inflation on liability.

Incorrect Treatment of Settlement Benefits

IAS 19 requires that an agreement, ​​an event that removes the employer's obligation for some or all of the benefits received under the defined benefit plan must be treated with care. Using the wrong settlement account can cause errors in the financial statements.

Why did this happen:

• Misclassifying the transaction as settlement rather than buy-ins or buyout.
• There is no accounting for the impact of liquidating other elements of IAS 19 (e.g. remeasurements).

How to avoid this:

• Clearly differentiate between buy-ins, buyouts and settlements.
• Please refer to IAS 19 guidance on settlements and related disclosures.
• Ensure that all impairments and gains/losses associated with the settlement have been accurately reflected.

Incorrect Treatment of Qualifying Insurance Policies and Reimbursement Rights

Qualified insurance policies and reimbursement rights play an important role in reducing the risk of pension schemes. IAS 19 describes specific rules for this but mistakes often happen.

Why did this happen:

• Misinterpretation of what constitutes a qualifying insurance policy.
• Failure to measure insurance policies at a fair value as required by IAS 19.

How to avoid this:

• Ensure that the insurance policy meets the IAS 19 eligibility criteria.
• Verify insurance policies and reimbursement rights using appropriate assessment techniques.
• Regularly revert or align between the liability and the value of the corresponding policies.

Not Allowing for Mortality Improvement

The presumption of mortality is the cornerstone of pension liability assessments. IAS 19 give importance to the need to reflect current trends in life expectancy and future uncertainties in pension reporting.

Why did this happen:

• Reliance on a fixed mortality schedule with no adjustments for improvement
• Ignore longevity trends specific to the data or policyholder’s region.
• Using assumptions that are inconsistent with market practices.

How to avoid this:

• Use mortality tables that reflect recent demographics and trends.
• Includes factors for improving mortality rates (such as Continuous Mortality Investigation (CMI) Projections).
• Collaborate with actuaries to periodically improve the assumptions.

Choice of Discount Rate Not Compliant with IAS 19

The discount rate must be set by taking reference from the ‘term of the liability’, which tells us the time over which benefits are expected to be paid. If there is an error in choosing the discount rate then it can lead to various problems.

Why did this happen:

• Incorrect interpretation of IAS 19 discount rates provisions.
• Lack of availability of suitable data of the company's bonds.
• Intend to manipulate the discount rate to produce more satisfactory reports.

How to avoid this:

• Manage discount tax selection in line with IAS requirements.
• Use robust methods to predict the performance of corporate bond yields when market information is sparse.
• Document the reasons and sources for the selected discount rates.

Conclusion

IAS 19 Pension statements are one of the most complex parts of a financial statement. Errors, whether caused by incorrect assumptions, Interpreting project rules or insufficient information, will have a wide impact. By addressing the six common issues described above, organizations can ensure that their pension reports are accurate and consistent.

By investing in expertise, technology and efficient processes you are not only protecting your organization from compliance risks, but it will also provide transparent and reliable financial information to stakeholders. In the end efforts to achieve accurate IAS 19 reporting will pay dividends in trust, reliability and sound financial management.

Frequently Asked Questions