Module I· Pensions AccountingIntermediate
Question
What are plan assets, and how are they valued?
Answer
Mechanics
Plan assets are assets held in a legally separate pension trust or pension fund and reserved to satisfy pension claims.
Requirements for IAS 19 recognition
- Legally separate from the employer's assets, often through a contractual trust arrangement.
- Usable only for pension obligations.
- Protected from insolvency.
Valuation
Fair value at the balance-sheet date. Typical allocation:
- Bonds: 40-60%
- Equities: 25-40%
- Real estate: 5-15%
- Alternative investments, such as hedge funds or private equity: 5-15%
Deep diveShow more details
Net pension liability
```
Net pension liability = DBO - plan assets
```
- If plan assets > DBO, the plan is overfunded and may create a pension asset, but IAS 19 applies an asset ceiling based on economic benefit.
- If plan assets < DBO, the plan is underfunded and creates a liability. This is common for many DB plans.
Asset-allocation strategy
Liability-driven investment (LDI) means the plan-asset mix is designed to match the DBO's duration and sensitivities.
Pitch tip
Funding status, plan assets / DBO, is a health indicator. Less than 70% can signal distress, 70-90% is a normal range for many DB plans, and >95% is strong. In DD, track the 5-year funding trend as a capital-demand indicator.