Plan assets are assets/investments held by a long-term employee benefit fund for the purpose of paying benefits to employees. These include long-term investments and qualifying insurance policies.
Only such assets qualify as plan assets which are held by the legal entity specifically set up to manage the pension fund. The fund sponsor (i.e. the company which created the fund) cannot use any of the plan assets for any purpose other than payment to the fund members (most often not even in bankruptcy) except in limited circumstances where the remaining plan assets are sufficient to meet all pension liabilities and the withdrawal is reimbursement of excess benefits already paid.
An insurance policy issued by a party not related to the sponsor/employer also qualifies as a plan asset if it can only be used to pay pension benefits except where there are surplus proceeds in which case these may be paid back to the employer as reimbursement of any excess benefits already paid.
Plan assets are typically invested in different asset classes depending on the risk and return profile of the fund participants.
Plan assets are presented in the balance sheet at their fair value where they are netted off against plan liabilities to determine the pension asset/liability.
Reconciliation between opening and closing plan assets
Reconciliation between opening plan assets and closing plan assets would look like as follows:
|Opening plan assets||XXX|
|Add: contributions received from employer||XXX|
|Add: actual return on plan assets||XXX|
|Less: Benefits paid||(XXX)|
|Add/Less: actuarial gains and losses||XXX|
|Closing plan assets||XXX|
The value of plan assets increases whenever the employees or the employer make additional contributions to the plan and whenever the existing plan assets earn a positive return, and it decreases when benefits are paid out to employees. Similarly, actuarial gains and losses also affect the value of pension plan assets.
The return on plan assets include interest earned, dividends earned, realized and unrealized gains or losses minus taxes payable by the plan minus administrative costs of the plan.
CE Ltd. has a funded defined benefit plan. Its plan assets had a fair value of $25 million as at 1 January 20X1. These include $15 million equity investments and $10 investment in bonds. Equity investments are expected to pay a dividend of $1 million during the year. Bonds are expected to pay an interest rate of 6%. The fund received contributions of $5 million during the year and paid out $3 million to employees. The fair value of the investments as at 31 December 20X1 is $30 million.
Reconcile the opening balance of plan assets with closing balance.
The following table shows the reconciliation between opening and closing plan assets:
|USD in million|
|Opening plan assets||25|
|Add: contributions received from employer||5|
|Add: actual return on plan assets||1.6|
|Less: Benefits paid||(3)|
|Add/Less: actuarial gains and losses||1.4|
|Closing plan assets||30|
Return on plan assets equals the sum of dividends and interest. Since dividends amount to $1 million and interest income is $0.6 million (=$10 million × 6%), total return is $1.6 million.
The actuarial gains/losses in the above reconciliation are worked out as a balancing figure:
Actuarial gain/(loss) = closing plan assets – (opening plan assets + contributions + actual return – benefits paid)
Actuarial gain/(loss) = $30M – ($25M + $5M + $1.6M – $3M) = $30M - $28.6M = 1.4M