- This topic has 3 replies, 2 voices, and was last updated 10 years ago by
.
- Posts
The above question has the phrase ” Since the pension liabilities are fully insured and indexation of future liabilities can be limited up to and including the funds available in”
What’s this “indexation” thing? I don’t really get it could you explain it to me because it’s relevant in the answer too, the examiner writes “Alexandra has to provide for an average pay pension plan with limited indexation, the indexation being limited to the amount available in the trust fund. The pension plan qualifies as a defined benefit plan under IAS 19.” So what does “indexation” mean and how is it relevant to the plan being defined as defined benefit rather than contribution? Is indexation the contribution that the company pays annually? I couldn’t find this word in the IAS 19 chapter in the study text so it seems strange and elusive.
Thanks.
Indexation is a method of re-assessing the value of an asset or an obligation by reference to some external measure such as the retail price index
A defined contribution scheme has nothing to do with indexation – it’s merely the building up of a fund that will be available to pay a retiring employee a pension. But the way in which it is built up is by the contributions from the company as measured by a benchmark for example the employees salary. The company may pay in a defined amount say 10% of the employees’ salaries hence it’s a defined contribution.
If on the other hand the company wishes to operate a defined benefit scheme then they need to perform all sorts of guesswork calculations to try to estimate the likely obligation to their pensionable employees often using indexation to assist in that measurement
OK?
Okay so if I get this right it’s like saying we have to take into account inflation for defined benefit schemes because inflation affect the salary of the employees and defined benefit schemes are calculated on the final salary of the employees (therefore also known as “final salary schemes”) and therefore this whole indexation thing comes up?
Right?
I must be bothering you today with a lot of questions but I’m so excited to do past P2 papers today as I really want to clear this paper in Dec. So sorry!
- You must be logged in to reply to this topic.