Various types of costs for pension commitments
When ITP 2 is administered using a book reserve method, there are costs which arise due to changes in the pension liability and other costs.
Changes in pension liability
- Newly accrued pension entitlement
- Interest indexation of the pension liability
- Indexation of the pension commitments
- Operating costs for pension administration to PRI Pensionsgaranti
- Credit insurance premiums to PRI Pensionsgaranti, less any bonus
- Payment obligation less entitlement to compensation (cost balancing)
- Tax on returns from pension funds
- Employer’s contributions
For companies that choose to purchase insurance and thus pay a premium to Alecta, the operating costs (administration fee) and tax on returns from pension funds are included in the premium. In connection with book reserve method pensions, these costs are clarified and booked separately, which provides greater transparency. Employer’s contributions are calculated and booked regardless of whether the company chooses to report the pension commitment as a liability or to purchase insurance from Alecta.
Companies may have different methods for booking their pension liability and their pension expenses:
- Reporting the pension liability and pension expense once per year based on the communications made by PRI Pensionsgaranti at the close of the accounting year for the company.
- Reporting pension liability and pension expenses continually during the year based on the information reported in the webservice.
- Proceeding based on the forecast and change to the liability allocated to a particular period on a straight-line basis, which is booked as a change in liability continually during the year. The actual pension liability and pension expenses are booked at the end of the year.
- Booking pension expenses continually during the year using standardised payroll overhead and, at year end, booking the actual pension liability and pension costs.
For companies that choose to bear the pension commitments on their own and thus book them as liabilities on the balance sheet, PRI Pensionsgaranti administers the pension disbursements.
Twice a year, PRI Pensionsgaranti receives funds related to the upcoming pension disbursements from the companies, which take place based on a forecast. Since the actually disbursed pensions may deviate from the forecast, a balance may arise between PRI Pensionsgaranti and the companies. This balance must be reported by the companies as a current receivable or current liability. Interest is payable on the balance (balance interest), which must be reported by the companies as interest income and interest expense, respectively. Calculation of financial expenses for ITP 2 According to generally accepted accounting principles, the total pension costs for ITP 2 book reserve method pensions are be divided into operating cost and financial expense.
The reason for this breakdown is that the increase in the pension liability includes an interest factor in the form of the discount rate. Therefore, the financial expense should be a measure of how much the pension liability has increased as a result of this interest rate.
The rate for calculation of the financial expense is determined by PRI Pensionsgaranti and consists of the gross amount on the discount rate, currently four per cent.
The financial expense is calculated by multiplying the average pension liability during the year by the percentage rate for calculation of financial expense.
The other element of the total pension costs is operating cost. This breakdown makes it possible to compare companies which have purchased insurance from Alecta and companies which have chosen to manage their pension commitments using the book reserve method.