Offset versus asset method for hybrid plans

In Indonesia, postemployment benefits provided by employers under labour law are defined benefit (DB) in nature. This means that an employee’s length of service and final salary determine the size of benefit awarded. The law only regulates the provision of benefits to employees who reach normal retirement age or leave employment because of death or disability. Benefits on resignation are set by each employer. The benefits that are due are summarised as follows:

• On normal retirement, employees receive a lump sum benefit of from minimum 2.3 times their final salaries up to a cap of 32.2 times their final salaries (depending on their service at normal retirement)
• On death, benefits based on service at death at similar levels to normal retirement
• For disability, employees will receive a higher benefit of up to a cap of 43.7 times their last salaries

The law also states that if the employer sets up a pension plan, and the contributions were paid by the employer, the pension plan may reduce the total employer obligations for postemployment benefits in accordance with the labour law.

In Indonesia, there are two types of pension plans used to fund postemployment benefits: defined benefit pension plans (PPMPs) or defined contribution pension plans (PPIPs).

Indonesian employers are currently less enthused by PPMPs, which is due to the long-term risks involved. PPIPs are more in demand today because an employer's liabilities are more measurable, namely the amount of contributions that are due every month (usually a percentage of base salary).

In the calculation of an employer’s liabilities for postemployment benefits, it is common for Indonesian plans to be categorised as a hybrid plan, which is due to the labour law benefits provided by the employer funded by the other postemployment benefits under a PPMP or PPIP. The hybrid definitions are either a combined DB-DB plan (which provides labour law DB benefits and additional DB benefits through a PPMP) or a DB-defined contribution (DC) plan (which provides labour law DB benefits and additional DC benefits through a PPIP).

The treatment of hybrid DB-DB plans is simple because, in general, the calculation of plan assets held is very clear; it is simply the current asset value.

On the other hand, for DB-DC plans, there are two alternative methods used for disclosure. The employer can disclose the total assets and liabilities for both the PPIP benefits and the labour law benefits that are due (which we refer to as the asset method). Alternatively, it can offset an amount in respect of the labour law benefits from the assets and liabilities. We refer to this as the offset method. A common question arising from both actuaries and auditors in Indonesia is which method is more appropriate. Why does this question arise so frequently for employers with PPIP plans? We believe it is because there is no technical standard for actuaries or accountants on the calculation of liabilities under the offsetting method.

The assets of the PPIP need to meet the requirements of a plan asset or an offset in the accounting standards International Accounting Standard (IAS) 19 or Pernyataan Standar Akuntansi Keuangan (PSAK 24). For the plan assets, the requirements are met because the plans are managed separately from the employer and only used to fund employee benefits. Existing funds also cannot be returned to the employer unless the remaining assets of the fund are sufficient to meet all the employee benefit obligations of the plan or the assets are returned to the reporting entity to reimburse it for employee benefits already paid.

If the PPIP is treated as a plan asset, then an adjustment needs to be made to the liabilities for labour law benefits, allowing for the fact that a surplus arising from one employee cannot be used to cover the deficit for another employee. There is additional complexity when there is a defined contribution plan that is used to fund only a portion of the labour law benefits (e.g., only the pension benefits). In this case, the existing assets can only be used to fund the pension benefits with the other benefits (such as death and disability) provided on top.

If the PPIP is treated as an offset, then it should meet the offset requirements in IAS 19 & PSAK 24. The requirements allow an entity to offset an asset relating to one plan against a liability relating to another plan when it can legally settle liabilities under the other plan and it intends to do so either on a net basis or to realise the surplus in one plan and settle its obligation under the other plan simultaneously.

The asset method for PPIPs tends to be more complex. The calculation of the value of the liability for the offset method will be more explicit and clear as the existing accumulated contributions will be used as the deduction for each type of labour law benefit that is due to be provided (e.g., the retirement or death benefit).

In our view, the offset method is more appropriate. The calculation of a net basis for each individual is considered to generate a more detailed liability than if the total accumulated contributions are treated as plan assets. However, there are no standards governing the technical calculations for the individual liabilities, so there is not a legal requirement as to whether it should be treated as a plan asset or offset.