Chap018 - Chapter 18 - Pension Funds Answers to Chapter 18...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 18 - Pension Funds Answers to Chapter 18 Questions 1. Private pension funds are created by the private entities (e.g., manufacturing, mining, or transportation firms) and are administered by private corporations (financial institutions). Public pension funds are those funds administered by a federal, state, or local government (e.g., Social Security). 2. Pension plans administered by life insurance companies (about 25 percent of the industry = s assets) are termed insured pension plans. The distinction is due not necessarily to the type of administrator, but to the classification of assets in which pension fund contributions are invested. Specifically, there is no separate pool of assets. Rather the funds are invested in the general asset accounts of the insurance company. The portion of the insurance company = s assets devoted to the pension fund are reported in the liability section under pension reserves. Noninsured pension plans (administered by mutual funds and other financial institutions) are managed by a trustee appointed by the sponsoring business, participant, or union. Trustees invest the contributions and pay the retirement benefits in accordance with the terms of the pension plan. 3. In a defined benefit pension plan, the employer (or plan sponsor) agrees to provide the employee a specific cash benefit upon retirement, based on a formula that considers such factors as years of employment and salary during employment. The formula is generally one of three types: flat-benefit, career-average, or final-pay formula. With a defined contribution pension plan the employer (or plan sponsor) does not commit to provide a specified retirement income. Rather, the employer contributes a specified amount to the pension fund during the employee = s working years. The final retirement benefit is then based on the total employer contributions, any additional employee contributions, and any investment gains or losses. 4. The three types of formulas used to determine pension benefits for defined benefit pension funds are flat-benefit formula, career-average formula, and final-pay formula. A flat benefit formula pays a flat amount for every year of employment. Two variations of career-average formulas exist; both base retirement benefits on the average salary over the entire period of employment. Under one formula retirees earn benefits based on a percentage of their average salary during the entire period they belonged to the pension plan. Under the alternate formula, the retirement benefit is equal to a percentage of the average salary times the number of years employed. A final-pay formula pays a retirement benefit based on a percentage of the average salary during a specified number of years at the end of the employee
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/28/2012 for the course FINE 442 taught by Professor Larbihammami during the Spring '12 term at McGill.

Page1 / 4

Chap018 - Chapter 18 - Pension Funds Answers to Chapter 18...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online