Post-employment benefits are benefits, other than termination benefits that are payable after completion of employment, typically after the employee retires. Where post-employment benefits involve significant obligations, it is common for employers to contribute to a post-employment benefit plan for employees. For example, in Australia, it is compulsory for most private sector employers to contribute to a superannuation plan for employees.
Post-employment benefit plans are defined in para 8 of IAS 19 as: formal or informal arrangements under which an entity provides post-employment benefits for one or more employees.
Other Names Of Post Employment Benefit Plans:
Post-employment benefit plans are also referred to as (a) superannuation plans, (b) employee retirement plans and (c) pension plans.
The employer makes payments to a fund. The fund, which is a separate entity, typically a trust, invests the contributions and provides post-employment benefits to the employees, who are the members of the fund.
Types Of Post Employment Benefit Plans:
There are two types of post-employment benefit plans. The two types of post-employment benefit plans are:
(1) defined contribution plans (including multi-employer plans)
(2) defined benefit plans
(1) defined contribution plans:
Defined contribution plans as post-employment plans for which an entity pays fixed contributions into a separate entity. The contributions are normally based on the wages and salaries paid to employees. The contributing entity has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employees’ service in the current and prior periods. The amount received by employees on retirement is dependent upon the level of contributions and the return earned by the fund on its investments.
(2) defined benefit plans: Defined benefit plans are defined as post-employment plans other than defined contribution plans. If a post-employment plan is not classified as a defined contribution plan, by default, it is a defined benefit plan.
Critical to the definition of a defined contribution post-employment benefit plan is the absence of an obligation for the employer to make further payments if the fund is unable to pay all the benefits accruing to members for their past service.
Thus, defined benefit post-employment plans are those in which the employer has some obligation to pay further contributions to enable the fund to pay members’ benefits. In a defined benefit post-employment plan, the benefit received by members on retirement is determined by a formula reflecting their years of service and level of remuneration. It is not dependent upon the performance of the fund.
If the performance of the fund is insufficient to pay members’ post-employment benefits, the trustee of the fund will require the employer, who is the sponsor of the fund, to make additional payments to the fund. Similarly, if the fund achieves higher returns than are required to pay members’ post-employment benefits, the employer may be able to take a ‘contribution holiday’.
Why Employers often prefer defined contribution plans?
Most private sector and many public sector post-employment benefit plans are defined contribution plans. Employers often prefer defined contribution plans because there is no risk of liability for further contributions if the fund fails to earn an adequate return. IAS 19 prescribes accounting treatment for contributions to post-employment benefit funds and assets and liabilities arising from post-employment benefit plans from the perspective of the employer. It does not prescribe accounting requirements for the post-employment benefit fund.