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Query No. 40
Subject: Recognition of Annuity Policy purchased from the Life Insurance Corporation of India under ‘Return of Corpus Scheme’ by a Pension Trust.
A. Facts of the Case
1. A private sector bank (hereinafter referred to as the ‘bank’), whose equity and debt securities are listed in two recognised stock exchanges, has, amongst other benefit schemes to its employees, a defined pension benefit plan on retirement of its employees. The pension liability of the bank is managed through a Pension Fund Trust, which is approved under the relevant Income-tax Rules, through purchase of an Annuity Policy for each of its employees from the Life Insurance Corporation of India (hereinafter referred to as the ‘LIC’). The LIC is responsible for paying the pension/family pension to the employees/legal heirs of the employees of the bank on their retirement/ death.
2. During the year 2011-12, the Pension Fund Trust, in discharge of the pension liability for 134 retired staff, purchased a ‘specified’ Annuity Policy from the LIC under the ‘Return of Corpus’ (hereinafter referred to as the ‘ROC’) Scheme by contributing approximately Rs. 36 crore out of the Trust funds. Under the said scheme, the LIC will be disbursing pension to the employees exclusively covered under the scheme consequent upon their retirement. This corpus is refunded to the Pension Fund Trust consequent upon death of the retired staff covered under this Policy, which, in turn, takes a separate Annuity for payment of family pension.
3. The querist has separately clarified the following:
(i) In the event of any failure on the part of the LIC, the obligation of the LIC for payment of pension /family pension to the employees/legal heirs on their retirement/death rests with the Central Government by virtue of section 37 of the LIC Act, 1956.
(ii) The Pension Fund Trust maintains running account with the LIC for purchase of annuities and payment of pension. The refund of corpus will not reduce the need for the bank's contribution since the required contribution is already taken into account while estimating actuarial liabilities on pension duly taking into consideration family pension obligation also. Corpus amount received from the LIC on death of the pensioner under ROC method will be with the Pension Fund Trust and will not be returned to the bank.
(iii) The Pension Fund Trust is getting periodical contributions from the bank as per the actuarial valuation of obligation for pension including family pension. Actuarial valuation covers the bank’s obligation towards service pension to the pension opted staff members on superannuation and also the family pension on the death of the pensioner. Hence, the returned corpus is not the source to purchase the Annuity towards family pension benefit payable to the legal heirs.
(iv) The amount payable for purchasing Annuity for family pension will be less than the amount of corpus returned. The entire amount received back will be with the Pension Fund Trust and will not be returned to the bank.
(v) The Annuity for payment of family pension is not purchased under ‘ROC’ scheme. Hence, after the death of the family pensioner, the amount already paid for purchase of the Annuity is not refundable to the Trust.
(vi) As per the Trust administration, balance sheet is prepared for the financial year duly certified by the Trust Auditor as per the Standards applicable to the Trusts.
4. The treatment followed by the Pension Fund Trust is as follows:
(a) As the entire purchase consideration will be returned by the LIC to the Pension Fund Trust, the Annuity purchased under the ‘ROC’ scheme is treated as an asset and classified under ‘Long-Term Investments’.
(b) Considering the substance rather than the legal form of the transaction, the asset is classified as long-term investment.
(c) The Pension Fund Trust carries the investment at cost as it is held till maturity and no valuation is done till maturity.
(d) The cost of investment is reduced as and when the corpus is returned by the LIC on the death of a retired employee.
5. The querist has analysed the Accounting Standards issued by the Institute of Chartered Accountants of India covering ‘Investments’ and ‘Employee Benefits’ in detail as below to ascertain their applicability to the ‘specified’ Annuity Policy accounted for by the Pension Fund Trust as a long-term investment:
I. Accounting Standard (AS) 13, ‘Accounting for Investments’:
Paragraph 2 of AS 13 reads as follows:
“2. This Standard does not deal with:
(a) ...
(c) investments of retirement benefit plans and life insurance enterprises ; and
(d) ...”
From the above, it can be seen that AS 13 is not applicable to the investments of the Pension Fund Trust.
II. Accounting Standard (AS) 15 (revised 2005), ‘Employee Benefits’:
The Pension Fund Trust adopts AS 15 (revised 2005).
Identifying the type of Post Employment Benefit:
(i) Paragraph 7.3 of AS 15 defines ‘post-employment benefits’ as “employee benefits (other than termination benefits) which are payable after the completion of employment”. Accordingly, pension payments are post-employment benefits. Paragraph 7.4 of AS 15 defines ‘post-employment benefit plans’ as “formal or informal arrangements under which an enterprise provides post-employment benefits for one or more employees”. The above paragraphs of AS 15 are applicable to the formal arrangement between the bank and the employees for providing pension benefits through the Pension Fund Trust.
(ii) AS 15 requires post-employment benefit plans to be classified as either ‘defined contribution plans’ or ‘defined benefit plans’.
(iii) Paragraph 7.5 of AS 15 defines ‘defined contribution plans’ as “post-employment benefit plans under which an enterprise pays fixed contributions into a separate entity (a fund) and will have no obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods”.
(iv) Paragraph 7.6 of AS 15 defines ‘defined benefit plans’ as “post-employment benefit plans other than defined contribution plans”.
(v) In order to meet the pension obligation to its retired employees, during the year 2011-12, the Pension Fund Trust had purchased ‘specific’ Annuity Policy from the LIC under the ‘ROC’ Scheme. As per the Policy terms, the LIC will be settling the pension obligations of the bank on an on-going basis till the happening of the event described in paragraph 2 above and the Pension Fund Trust will have no obligation to pay further contributions.
Insurance Policy – Whether a Plan Asset:
(i) Paragraph 7.16 of AS 15 defines a Qualifying Insurance Policy as below:
“7.16 A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party (as defined in AS 18 Related Party Disclosures) of the reporting enterprise, if the proceeds of the policy:
(a) can be used only to pay or fund employee benefits under a defined benefit plan; and
(b) are not available to the reporting enterprise’s own creditors (even in bankruptcy) and cannot be paid to the reporting enterprise, unless either:
(i) the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit obligations; or
(ii) the proceeds are returned to the reporting enterprise to reimburse it for employee benefits already paid.”
In terms of the ‘specified’ Annuity Policy issued under the ‘ROC’ scheme, the LIC returns the entire contribution to the Pension Trust on the death of a retired employee. As per the querist, the payment does not satisfy the conditions mentioned above and the ‘specified’ Annuity Policy is not a ‘qualifying insurance policy’ in terms of AS 15.
(ii) Paragraph 104 of AS 15 is reproduced below:
“Sometimes, an enterprise is able to look to another party, such as an insurer, to pay part or all of the expenditure required to settle a defined benefit obligation. Qualifying insurance policies, as defined in paragraph 7, are plan assets. An enterprise accounts for qualifying insurance policies in the same way as for all other plan assets and paragraph 103 does not apply (see paragraphs 40-43 and 102).”
As per the querist, as elucidated above, the ‘specified’ Annuity Policy with the LIC is not a ‘qualifying insurance policy’ in terms of AS 15.
(iii)Thus, as per the querist, paragraph 43 of AS 15 becomes relevant.
First sentence of paragraph 43 of AS 15 reads as below:
“Where an insurance policy is in the name of a specified plan participant or a group of plan participants and the enterprise does not have any obligation to cover any loss on the policy, the enterprise has no obligation to pay benefits to the employees and the insurer has sole responsibility for paying the benefits.”
The ‘specified’ Annuity Policy is in the name of the Pension Fund Trust. Beneficiaries under the policy are the retired employees. The Policy terms provide that neither the Pension Fund Trust nor the bank (the employer) carries any legal or constructive obligation to cover any loss on the policy since the policy is taken as per the terms of the LIC.
Second sentence of paragraph 43 of AS 15 reads as below:
“The payment of fixed premiums under such contracts is, in substance, the settlement of employee benefit obligation, rather than an investment to meet the obligation. Consequently, the enterprise no longer has an asset or a liability.”
The following points are to be noted with respect to the ‘specified’ Annuity Policy purchased under the ‘ROC’ scheme:
(a) The Pension Fund Trust makes an initial lump sum single premium, by way of a corpus. This is a capital contribution that is used by the LIC to settle the pension obligations.
(b) The quantum of single premium payable initially is determined by the LIC on the basis of, and by adopting, an appropriate valuation process including actuarial valuation process.
(c) Once this contribution is given, the LIC assumes the responsibility for settling the employee benefit obligations i.e., the pension due to the retired employee during his life time and issues a Policy.
(d) This corpus is refunded to the Pension Fund Trust consequent upon the death of the retired staff covered under this Policy, which in turn takes a separate Annuity for payment of family pension. Already, 4 pensioners deceased and the LIC refunded the entire premium paid by the Pension Fund Trust.
6. As per Rule 89 of the Income-tax Rules, 1962, public sector banks and other similar entities can manage their own Pension Funds through a Trust established for the purpose and approved under the said Rules. The investments are made by these Pension Funds as per the pattern of investments prescribed by the Ministry of Finance, Government of India. The investments are carried at cost and their market value is disclosed in the balance sheet for information only. No depreciation/ appreciation is required to be recognised since the investments are to be held till maturity and no trading is normally permitted. These investments are comparable to the investments categorised as ‘Held-to Maturity’ (‘HTM’) by the banks. The banks carry the HTM investments at cost only. (Emphasis supplied by the querist).
As per the querist, the investment made by the Pension Fund Trust is a long-term investment akin to ‘HTM’ investment and is carried at cost.
B. Query
7. Given the above background, the querist has sought the opinion of the Expert Advisory Committee as to whether the Pension Fund Trust can hold the said long-term investment at cost, considering the nature of asset appearing in the balance sheet of the Trust.
C. Points considered by the Committee
8. The Committee notes that the basic issue raised by the querist relates to correctness of exhibition of amount paid for ‘specified’ Annuity Policy towards retirement pension as long-term investment at cost in the balance sheet of the Pension Fund Trust of the bank. The Committee has, therefore, considered only this issue and has not examined any other issue that may be contained in the Facts of the Case, such as, accounting treatment in the books of the bank, accounting treatment of Annuity in respect of family pension, implications of retired employees having no legal heirs and legal heirs predeceasing the retired employees, measurement of liabilities and assets, if any, other than the Policy of the Pension Fund Trust, detailed accounting aspects, disclosures, any statement other than balance sheet that might be required to be presented, etc. The Committee presumes that other than premium, there is no other cost, such as, brokerage, on acquisition of the above mentioned Policy. Throughout this opinion, the term ‘retirement pension’ excludes family pension payable to the legal heirs on death of the retired staff. The Committee expresses its opinion purely from the accounting perspective and not from any other perspective including income-tax perspective. The Committee wishes to point out that since the querist has made reference to Accounting Standards in paragraphs 3 and 5 above, without going into the question of mandatory applicability of Accounting Standards to the Pension Fund Trust, the Committee expresses its opinion in the context of Accounting Standards. To the extent a contrary treatment is prescribed specifically or implied by a regulatory requirement, that treatment should be followed by the Pension Fund Trust.
9. At the outset, the Committee wishes to point out that Accounting Standard (AS) 15 (revised 2005), ‘Employee Benefits’, does not deal with accounting and reporting by employee benefit plans (see paragraph 2 of AS 15). It only deals with accounting by an employer for employee benefits (except employee share-based payments) (see paragraph 1 of AS 15). Hence, AS 15 is not applicable for accounting by the Pension Fund Trust. Further, the Committee also notes that rights arising under an insurance contract held by a policyholder has also been excluded from the scope of Accounting Standard (AS) 30, ‘Financial Instruments: Recognition and Measurement’, issued by the Institute of Chartered Accountants of India.
10. The Committee notes the scope exclusion mentioned in paragraph 2 of AS 13, pointed out by the querist in paragraph 5 above. Irrespective of the said scope exclusion, the Committee is of the view that an asset may be considered as an ‘Investment’ for accounting purposes, if it meets the definition given in paragraph 3.1 of AS 13, notified under the ‘Companies (Accounting Standards) Rules, 2006 (hereinafter referred to as the ‘Rules’), as reproduced below and not within the scope of another Accounting Standard:
“3.1 Investments are assets held by an enterprise for earning income by way of dividends, interest and rentals, for capital appreciation, or for other benefits to the investing enterprise. …”
The Committee notes that the Annuity Policy taken by the Trust gives two types of rights/benefits to the trust, first, annuity payment during the lifetime of the retired employee and secondly, the return of corpus on the death of the retired employee. Thus, considering the aforementioned definition of ‘investment’, the Committee is of the view that the Annuity Policy in the extant case is of the nature of ‘investment’. Further, as regards nature of the investment, the Committee notes the following paragraphs of AS 13, notified under the ‘Rules’:
“3.2 A current investment is an investment that is by its nature readily realisable and is intended to be held for not more than one year from the date on which such investment is made.
3.3 A long-term investment is an investment other than a current investment.”
The Committee is of the view that since the maturity of the policy is life-contingent, from a portfolio perspective, such investments are carried by the trust for a long-term objective. Further, since the querist has made reference to ‘long-term investment’ in paragraphs 4, 6 and 7 above, it appears that return of corpus is not expected to take place within one year from the date of taking out the ‘Policy’ under ‘ROC’ scheme and therefore, the Annuity Policy under the ROC scheme should be classified as a ‘long term investment’. Accordingly, considering the requirements of paragraph 32 of AS 13 (reproduced below), the Committee is of the view that in the absence of a specific standard for such investment and in the context of historical cost concept of accounting, same should be carried in the financial statements at cost.
“32. Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually.”
D. Opinion
11. On the basis of the above, the Committee is of the opinion that the investment should be carried in the balance sheet of the Pension Fund Trust as ‘long term investment’ at cost, as explained in paragraph 10 above, in case there is no regulatory requirement, express or implied, to the contrary.
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[1]Opinion finalised by the Committee on 16.1.2015.
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