Implications of second pillar pensions for a locally regulated private entity

Abstract

Purpose: This study aims to assess the implications of second pillar pensions on the financial statements of a private entity in Malta. The accounting requirements and disclosures set out by IAS 19 – Employee Benefits are evaluated to assess the impact of Defined Benefit and Defined Contribution plans on the entity’s financial statements. Additionally, the study evaluates and compares the financial implications of each plan by applying different scenarios and assumptions. Design: Three semi-structured interviews were carried out with the Head of HR of the private entity, a pension reform expert, and a certified actuary. A quantitative case study research approach is applied using a single, holistic research strategy. The necessary data was obtained from the regulated private entity to perform the computations. Microsoft Excel was utilised to arrive at the results, which were then incorporated into the financial statements. A base case scenario was identified for each scheme, and sensitivity analysis using variable variations was carried out. Findings: The study indicates that under Defined Benefit plans, the pension obligation ranged from €56.94M to €22.33M, while the decrease in TCI was between €1.43M and €0.33M. Defined Contribution plans experienced a decrease in profits ranging from €0.38M to €0.09M. Conclusion: This research concludes that Defined Contribution plans have a comparatively lower financial impact on the financial statements and are relatively more stable in response to changes in assumptions when compared to Defined Benefit plans. Therefore, Defined Contribution plans might be favoured over Defined Benefit plans. Value: This study contributes towards the literature on second pillar pensions for the local and foreign context by providing insight into the financial implications of both plans in accordance with IAS 19. Furthermore, the analysis will also provide value to the private entity, which it may benefit from. Given the need for more awareness of the importance of a second pillar, this research will aid in establishing an understanding of the financial implications of occupational pension plans.