Vinu: Manu, I heard that companies need to save money for employees’ pensions when they retire. How does that work?

Manu: Yes, Vinu! When a company promises to pay pensions to its employees after they retire, it’s like they’re agreeing to give them a monthly amount for the rest of their lives. But to keep this promise, the company needs to set aside money today. This is called a defined benefit pension plan, and they hire an expert called an actuary to calculate how much money they need to save.

Vinu: Okay, so how do they know how much money they need to save for the pensions?

Manu: Great question, Vinu! Let’s say the company calculates that they need Rs. 100 Lakhs to cover all the pension payments in the future. But the company has already saved Rs. 90 Lakhs in their pension fund. So, they still need to set aside Rs. 10 Lakhs more. This means they have a net pension liability of Rs. 10 Lakhs.

Vinu: I see. But what if something changes? How does the company adjust the amount they need to save?

Manu: That’s a good point, Vinu! Sometimes, the company has to adjust the pension fund. There are two main things that can change:

Vinu: So, because of these changes, the company has to adjust how much money they owe for the pension?

Manu: Exactly, Vinu! Because of the changes:

Vinu: Got it! So how much does the company now owe in total for the pension?

Manu: Let’s calculate the new net pension liability:

Vinu: That makes sense! But if the company now owes more money, do they show this change in their profit and loss statement?

Manu:  Good question, Vinu! Instead of showing the Rs. 7 Lakhs increase directly in the profit and loss statement, the company recognizes these changes in a special section called Other Comprehensive Income (OCI). This keeps the regular profit and loss focused on the company’s core operations, and the pension changes are shown separately in OCI.

Vinu: So, the company remeasures the pension liability and shows the adjustments in a separate report, not affecting the normal profit and loss. Got it!

Manu: Exactly, Vinu! This way, the company accurately tracks its pension obligations, without confusing it with the regular business performance.