Pension scheme on a monthly basis

Reference no: EM13954508

You are the financial controller of C Ltd, a company which has recently established a pen- sion scheme for its employees. It chose a defined benefit scheme rather than a defined contribution scheme.

C Ltd makes payments into the pension scheme on a monthly basis as follows:

Employer's contribution of 12% of the gross salaries of the participating employees.
Employees' contribution (via deduction from salary) of 6% of gross salary.
Payments are made on the twentieth day of the month following payment of the salary.

C Ltd makes up financial statements to 31 December each year. On 30 June 1995 the scheme was subject to its first actuarial valuation. The valuation revealed a deficit of £2.4 million. The deficit was primarily caused by a change in the assumptions made by the actu- ary since the scheme was originally established. The deficit was extinguished by a one-off lump sum payment of £2.4 million into the scheme by C Ltd on 30 September 1995. The annual salaries of the scheme members for the year ended 31 December 1995 totalled £15 million, accruing evenly throughout the year.

Requirements

(a) Write a memorandum to your Board of Directors which explains:

the difference between a defined contribution scheme and a defined benefit scheme,
the accounting objective set out in SSAP 24 - Accounting for Pension Costs - concerning the determination of the charge for pension costs in the profit and loss account of the employing company,
why the accounting objective is more difficult to satisfy for an employer with a defined benefit scheme.

(b) Determine the total charge in the profit and loss account for pensions (EXCLUDING amounts deducted from employees' gross salaries) AND any balance sheet amounts in respect of pensions, explaining clearly where exactly on the balance sheet the amounts would be included.

Assume the provisions of SSAP 24 are followed by C Ltd.

You ascertain that at 30 June 1995 the average remaining service lives of the employees who were members of the pension scheme at that date was 24 years.

Reference no: EM13954508

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