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FRDNotes_Pensions - Notes Pensions Pensions(87 88 132R 158...

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Notes - Pensions 1 Pensions (87, 88, 132R, 158) and Other Post-Retirement Benefits (106) 1. Post Employment Benefits A. Focus 1. On pensions 3. Reporting is basically the same 4. Differences will be summarized B. Issues- 1. What are the guarantees or obligations? 2. What assets will cover the obligations? 3. Where do the contributions come from? 2. A few definitions for pension plans A. Defined contribution plans 1. Generates pension expense of certain amount Pension Expense Cash 2. Must pay in specified amount (then obligation ends) a) Company may pay in some amount b) Employee may be required to match (a portion) of the contribution 3. Retirement may be 30 years off, but obligation over 4. Employee takes risk that contributions will grow 5. Employee doesn’t know final benefit 6. Extreme versions a) Employee Stock Ownership Plans (ESOPs) - companies can contribute own stock to retirement plan b) B. Defined benefit plans 1. Promised certain retirement benefit 2. Can pay in almost anything today a) Can pay in more than necessary b) Can pay in less c) Requirement to pay for tax deductibility encourages funding 3. But obligation is fixed for most workers a) Follows a certain contractual arrangement (1) All employees in plan treated equally for tax deductibility (2) Company may have extra pension plan for top employees - not deductible 4. Company has risk – must supply benefits a) All vested benefits (employee owned) when due (1) Most workers have vested benefits (2) New workers may not have vested benefits – benefits lost if they quit b) All benefits included unvested benefits if plan is closed by the firm 5. Obligation actually resolved only in retirement a) Pension Benefit Guarantee Corp provides some benefit in bankruptcy b) Company pays insurance fee to PBGC each period c) A bit like FDIC, but not full coverage 6. Ultimate benefit typically based on percent * years worked * final salary 3. Another type of defined benefit plan A. Cash balance plan 1. Treated as a defined benefit plan 2. Actually a defined contribution with a defined return B. Employee is paid off each year through a fixed percent of salary C. Interest is earned at guaranteed rate on the investment 1. Benefit is fixed 2. Employee loses impact of high earning years (on previous work) 3. Conversions may be good for younger worker 4. Conversions bad for older worker D. Reported like a regular DBP plan
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Notes - Pensions 2 4. Issues for DBP – Most Issues are the Same for Post-Retirement Benefits A.Some economic issues 2. Valuation of assets available to meet those benefits B. Some reporting issues 1. Companies may have several plans a) b) Separate agreements, mergers, foreign plans
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FRDNotes_Pensions - Notes Pensions Pensions(87 88 132R 158...

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