chapter 16: pensions and other postretirement benefits
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Chapter 16: Pensions and Other Postretirement Benefits. Benefit plans Defined contribution Defined benefit Postretirement benefits other than pensions. What is a pension?. - PowerPoint PPT PresentationTRANSCRIPT
Chapter 16: Pensions and Other Postretirement Benefits
Benefit plansDefined contribution
Defined benefit
Postretirement benefits other than pensions
What is a pension?
an arrangement between an employer and employee for the payment of post-employment income, hereafter called pension benefits
Defined Contribution Plans
Benefit is defined as the future value of pension fund contributions made on an employee’s behalfExact value is unknown prior to retirement ; depends on future earnings of fund investmentsBenefits are solely a function of accumulated contributions; therefore, the term defined contribution Value of benefits is variable, dependent on contribution levels and earnings made on invested contributions
Defined Contribution Plans
Contribution rates normally stated as a percentage of wages or salaries
noncontributory, in which all contributions are made by the employer
contributory, where funding is shared by the employer and employee
assets are set aside for the sole purpose of paying pension benefits...pension fund
Defined Benefit Plans
Benefit is defined either as a specific dollar amount or by a general formula based on salary
Benefits may be expressed as a specific dollar amount, normally multiplied by years of membership in the plan (years of service) to determine the value of the benefit
Defined Benefit Plans
Value of pension benefits is directly related to the employee’s years of service
Benefits may be paid in one of two ways
as a single lump sum amount at retirement date
as a life annuity
Vesting
Refers to a qualifying period of pension plan membership that must be met before pension benefits legally exist
Pension benefits do not come into legal existence before vesting requirements are satisfied
Once benefits vest, there is a formal obligation between the plan and employees as set out in the terms of the plan
Single and Multiemployer Plans
Pension plans can be either single-employer or multiemployer plans
A multiemployer pension plan is one that is subject to collective bargaining agreements in which two or more employers are plan sponsors.
Under statutory requirements, one employer can contribute no more than 50 percent of initial contributions and
no more than 75 percent thereafter
Actuarial Funding of Defined Benefit Plans
Derive a time series of annual pension fund contributions that will accumulate to produce a projected pension fund balance sufficient to meet the cost of projected pension benefitsBuilds up a pension fund to the same future balance needed to meet expected retirement benefits
Actuarial Funding Methods
Accumulated benefits
Projected benefit
For very young plans, the accumulated benefit method would recognize substantially less each year than projected benefit methods, and the reverse would be true for very old plans
Accumulated Benefits Method
A separate contribution may be calculated to supplement service costService cost can be recalculated in such a way that the deficiency is implicitly funded as part of future service costsA literal measurement of the value of current accumulated benefits based on the benefit formula in a plan
Projected Benefits Method
Individual methods develop contribution rates for individuals, which are then summed to derive the total contribution for the plan Aggregate methods make funding calculations for the plan as a wholeA more even distribution of contribution levels with projected benefit methods.
ERISA, Social Legislation of 1974
Membership eligibility and vesting requirementsMandatory funding requirementsInvestment diversification requirementsThe guarantee of certain vested benefits in the event of plan terminations Pension Benefit Guaranty Corporation (PBGC)
Are pension funds well protected?
1980s overfunded pension plans and corporate raiders
Reduction of pension benefits
Convert existing plans into “cash balance plans”
Legal Relationships in Defined Benefit Plans
Sponsoring employer
A pension fund
Plan participants
The PBGC for plans subject to ERISA
Pension Accounting Standards
ARB 36
ARB 47
APB Opinion No. 8
FASB Interpretation 3
SFAS No. 35
SFAS No. 36
SFAS No. 87 and SFAS No. 88
SFAS No. 87 and SFAS No. 88
achieved greater uniformity in measuring accrued pension expense by mandating use of one actuarial method, the benefits/years-of-service approach
used service cost rather than the term normal cost
SFAS No. 132 Amended SFAS Nos. 87, 88, and 106
Relative to certain disclosuresReconciliation of beginning and ending balances of projected benefit obligation and fair value of plan assetsthe components of pension and OPEB expensesthe balances of unamoritized prior service costs and unrecognized gains or lossesdiscount rates, expected return on plan assets, and health care trend rates
Disclosures pertain to both pensions and OPRBs where applicable
Postretirement Benefits Other than Pensions
health carelife insurance outside of pension plansadditional welfare benefits such as
legal serviceshousing subsidiestuition assistanceday care
SFAS No. 106: 1990
OPEB costs are a form of deferred compensation in which the employer receives current services in exchange for future benefits
Requires recognition and measurement of OPEB costs and obligations
Chapter 16: Pensions and Other Postretirement Benefits
Benefit plansDefined contribution
Defined benefit
Postretirement benefits other than pensions