1. Chapter 15: Pensions and Other Postretirement Benefits Benefit plans Defined contribution Defined benefit Postretirement benefits other than pensions

2. What is a pension? an arrangement between an employer and employee for the payment of post- employment income, hereafter called pension benefits

3. Defined Contribution Plans Benefit is defined as the future value of pension fund contributions made on an employee’s behalf Exact value is unknown prior to retirement ; depends on future earnings of fund investments Benefits 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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 benefits Builds up a pension fund to the same future balance needed to meet expected retirement benefits

10. 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

11. Accumulated Benefits Method A separate contribution may be calculated to supplement service cost Service cost can be recalculated in such a way that the deficiency is implicitly funded as part of future service costs A literal measurement of the value of current accumulated benefits based on the benefit formula in a plan

12. 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 whole A more even distribution of contribution levels with projected benefit methods.

13. ERISA, Social Legislation of 1974 Membership eligibility and vesting requirements Mandatory funding requirements Investment diversification requirements The guarantee of certain vested benefits in the event of plan terminations Pension Benefit Guaranty Corporation (PBGC)

14. Are pension funds well protected? 1980s overfunded pension plans and corporate raiders Reduction of pension benefits Convert existing plans into “cash balance plans”

15. Legal Relationships in Defined Benefit Plans Sponsoring employer A pension fund Plan participants The PBGC for plans subject to ERISA

16. Pension Accounting Standards ARB 36 ARB 47 APB Opinion No. 8 FASB Interpretation 3 SFAS No. 35 SFAS No. 36 SFAS No. 87 SFAS No. 88 SFAS No. 106 SFAS No. 112 SFAS No. 132

17. 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

18. 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

19. SFAS No. 132 Amended SFAS Nos. 87, 88, and 106 Relative to certain disclosures Reconciliation of beginning and ending balances of projected benefit obligation and fair value of plan assets the components of pension and OPEB expenses the balances of unamoritized prior service costs and unrecognized gains or losses discount rates, expected return on plan assets, and health care trend rates Disclosures pertain to both pensions and OPRBs where applicable

20. Postretirement Benefits Other than Pensions health care life insurance outside of pension plans additional welfare benefits such as legal services housing subsidies tuition assistance day care

21. Improving Accounting Standards Remove actuarial gains and losses from pension expense and OPEB expense measurements and show the result below operating income. Also modify the corridor amortization so that a greater portion of actuarial gains or losses are recognized each year. OPEB benefits should be spread over the working life of employees and not just to the full eligibility date. Hence the expense would be recognized in accordance with how benefits are received. Any differences between the OPEB expense and liability can be easily handled as a non-current asset.

22. Chapter 15: Pensions and Other Postretirement Benefits Benefit plans Defined contribution Defined benefit Postretirement benefits other than pensions