(Papers) ACET Paper May 2010 "SA4 – Pension and Other
Q. 1) A central government public sector undertaking (CPSU) ( Company
A ) employing over 41,000 employees is considering to establish a Pension Plan
for its employees. The Government of India has for the first time permitted
CPSUs to contribute to a Pension Plan for its employees with effect from
1.1.2007 with the following conditions :-
- Ceiling of 30% of Basic Pay plus Dearness Allowance towards 4 elements
of superannuation benefits – Contributory Provident Fund, Gratuity, Medical
- Pension scheme should be a Defined Contribution (DC) scheme and not a
Defined Benefit (DB) scheme
- Pension benefit payable only to those superannuating from the company
- Minimum 15 years’ service on superannuation is a must in case of pension
- Enterprises to develop their own self sustaining schemes
- Create own trust & manage funds or operate through an insurance company
- Approval of Administrative Ministry
- Approval of Income Tax authorities
The CPSU Company A currently has following employee benefit schemes requiring
contributions as %age of pay bill (Basic Pay plus DA) as indicated :
Provident Fund = 12% Gratuity = 4.74% approximately
Medical Benefit= 6% approx. (average of last 2 years and increasing one)
Balance of about 7.26% is available for contribution to pension plan..
Company A has proposed a Pension Plan for your review, assessment of company
liability and guidance on various points connected with the proposed scheme, as
- Pension will be provided to those superannuating on or after 1.1.2007 on
completing minimum of 15 years’ service.
- Accrual rate - A lump sum corpus on retirement equivalent to 7 days’
final salary (Basic + DA) for each completed year of service. Lump sum
corpus will be used for purchase of annuity for the retired employees from
an insurance company.
- In case of ‘Death while in Service Pension for the Nominee’ – Accrual
rate same as for those superannuating at normal retirement age based on
pensionable salary as on the date of death. Accrual shall be for the
expected service till normal retirement age subject to a maximum of 30
- On leaving service before normal retirement age: No pension or transfer
a) (i) In what respects does the above proposed scheme differ from a
normal final salary pension scheme?
(ii) Your working suggests contribution rate of 6.6% of salary bill and
contribution for a new entrant at age 25 works out to 1.95% of pensionable
salary. List out the circumstances or conditions in which above proposed
contribution rate will lead to excess/under provisioning in the fund. Comment on
continued viability of the scheme.
(iii) Is the proposed scheme fair and equitable to all employees? If
not, explain with reasons.
(iv) The Chief Finance Officer (CFO) of the Company is of the view that
the cost of the proposed scheme should be around 2 to 3% of the salary bill. As
per him far greater benefits can be paid within 7.26% contribution. Comment on
how the CFO would have estimated the cost of the scheme as 2 to 3% and explain
with reasons, why your estimated contribution may be 6.6%.
(v) What provisions need to be incorporated in the benefit plan so
that under no circumstances employer contribution exceeds 30% of the pensionable
salary bill in any year?
(vi) What review process should be put in place to ensure ceiling of
30% of pensionable salary is not breached?
(vii) What possible issues can be raised by Administrative Machinery for
approval of the proposed pension plan?
(viii) If Administrative Ministry of the Government don’t admit the
proposed scheme as defined contribution (DC) plan, what changes can you suggest
in the structure
of the plan to make it compliant as DC plan? Will the modified plan raise any
issues of interests of different stakeholders and also of different groups of
employees? If so, list out those issues.
(ix) HR manager of the company has asked you whether the company, on
the basis of the proposed scheme, can get exemption from Employees Pension
Scheme (EPS), 1995. Specify the conditions for exemption from EPS and state with
reasons why the company on proposed scheme basis may not get exemption from EPS.
b) The CFO of the company has further approached you to explain:
i) Why are there differences in the recognition of actuarial gain/loss
in P&L account as per Indian GAAP AS 15( R ) and International GAAP IAS19? What
causes actuarial gain/loss to arise? List out points you shall cover in your
ii) What financial implications will be for the company of proposed
amendment to Gratuity Act to increase in Ceiling of maximum gratuity from Rs
3,50 lacs to Rs 10 lacs.
c) Company A also has international operations and requires to compile
accounts both as per AS15 ( R ) and IAS19. For earned leave encashment
liability, it does not maintain any fund. Calculate, for IAS19 reporting
requirement, minimum actuarial gain/loss to be recognised in the year’s P&L
account and Net cumulative unrecognized gain/loss as on 31.12.2009 based on the
following information available from the working of liability:
d) Above Company A is in negotiation to take over a UK based Company B
having a well established final salary pension scheme. Company A, the potential
purchaser has no previous experience of running a final salary pension scheme.
It is only considering to provide defined contribution pension arrangements for
its employees in India. Company A has asked you to advise on
i) The different risks that it will be taking with the final salary
pension scheme when compared with the defined contribution pension arrangements.
ii) Options available to reduce the risks associated with the final
salary pension scheme.