The outlook for pension contributions and profits in the US

2004 ◽  
Vol 3 (1) ◽  
pp. 77-97 ◽  
Author(s):  
ALICIA H. MUNNELL ◽  
MAURICIO SOTO
Keyword(s):  
Stock Market ◽  
Pension Plan ◽  
Pension Plans ◽  
Ageing Population ◽  
Defined Benefit ◽  
Bear Market ◽  
Defined Benefit Plans ◽  
Legislative Changes ◽  
Corporate Profits ◽  
The Impact

The bear market that began in 2000 focused attention on two issues – pensions and profits. The initial pension problem was the big decline in value of individual 401(k) accounts. The profit issue was misconduct and stock options. In fact, there is another compelling issue involving both pensions and profits – the impact of the bear market on defined benefit pension plans.Plan sponsors have a projected benefit liability, which until recently was covered by the rise in asset values during the extended bull market. When stock values fell by 50 percent, sponsors for the first time in decades had to contribute to their pensions. But even without the decline in the stock market, sponsors of defined benefit plans were going to face increased pension contributions in the coming decade. The reason is a host of regulatory and legislative changes in the late 1980s that slowed or limited pension contributions.Our analysis suggests that in the absence of the stock market boom and the regulatory and legislative changes that reduced funding, the average firm's contribution to its pension plan would have been 50 percent higher during the 1982–2001 period; corporate profits would have been roughly 5 percent lower.The deferred contributions are coming due. The decline in the stock market and an ageing population imply that contributions would double from their current level. As the economy emerges from recession and the bear market draws to a close, firms and investors must be prepared to contend with a strong headwind from pension funding obligations that could slow the recover.

scholarly journals The impact of aggregate mortality risk on defined benefit pension plans

2010 ◽  
Vol 9 (4) ◽  
pp. 481-503 ◽  
Author(s):  
IRENA DUSHI ◽  
LEORA FRIEDBERG ◽  
TONY WEBB
Keyword(s):  
Mortality Risk ◽  
Pension Plans ◽  
Defined Benefit ◽  
Benefit Plan ◽  
Defined Benefit Plans ◽  
The Impact ◽  
Carter Model ◽  
Male Workers ◽  
Defined Benefit Pension Plans

AbstractWe calculate the risk faced by defined benefit plan providers arising from uncertain aggregate mortality – the risk that the average participant will live longer than expected. First, comparing the widely cited Lee–Carter model to industry benchmarks that are commonly employed by plan providers, we show that these benchmarks appear to substantially underestimate longevity. The resultant understatement of liabilities may reach 12.2% for typical male participants in defined benefit plans and may reach 22.4% for male workers aged 22. Next, we consider consequences for plan liabilities if aggregate mortality declines unexpectedly faster than is predicted by a putatively unbiased projection. There is a 5% chance that liabilities of a terminated plan would be 3.1% to 5.3% higher than what is expected, depending on the mix of workers covered.

scholarly journals Life After Defined Benefit Plans

2011 ◽  
Vol 4 (8) ◽  
Author(s):  
Martin A. Goldberg ◽  
Robert E. Wnek ◽  
Michael J. Rolleri
Keyword(s):  
Pension Plan ◽  
Profit Sharing ◽  
Pension Plans ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Cash Balance ◽  
Benefit Plan ◽  
Defined Contribution Plans ◽  
Defined Benefit Plans ◽  
Recent Developments

Employers have moved from traditional pension plans to cash balance and other alternative defined benefit plans. However, it may be that the best approach lies beyond defined benefit plans completely. The Employee Retirement Income Security Act of 1974 (ERISA) was enacted to protect workers. Its focus was on the defined benefit plan, which at that time meant a traditional pension plan that provided lifetime income to retired workers. Over the years traditional pension plans have declined in number, often due to their increasing costs. Many of these plans have been replaced by the 401(k) plan, a profit-sharing plan partly or wholly funded by employee contributions. There has also been a rise in hybrid plans, plans that have features of both defined benefit and defined contribution plans. Recent developments highlight the weaknesses in traditional pension plans. Replacing a traditional pension plan with a cash balance plan, a hybrid plan that qualifies as a defined benefit plan, does not fully address all the problems. It may be that there is limited advantage to the continued emphasis on defined benefit plans. Instead, defined contribution plans that contain some features of defined benefit plans may better address the current retirement-plan issues.

Operating costs of pension funds: the impact of scale, governance, and plan design

2007 ◽  
Vol 8 (1) ◽  
pp. 63-89 ◽  
Author(s):  
JACOB A. BIKKER ◽  
JAN DE DREU
Keyword(s):  
Economies Of Scale ◽  
Pension Plan ◽  
Pension Funds ◽  
Operating Costs ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Defined Benefit Plans ◽  
Plan Design ◽  
Using Data ◽  
The Impact

AbstractAdministrative and investment costs per participant appear to vary widely across pension funds. These costs are important because they reduce the rate of return on the investments of pension funds and consequently raise the cost of retirement security. This article examines the impact of determinants of these costs, such as the size, governance, pension plan design and outsourcing decisions, using data on all Dutch pension funds across the 1992–2004 period, including more than 10,000 observations. We find that economies of scale dominate the strong dispersion in both administrative and investment costs across pension funds. Industry-wide pension funds are significantly more efficient than company funds and other funds. The operating costs of pension funds' defined contribution plans are lower than those of defined benefit plans. Higher shares of pensioners make funds more costly, whereas the reverse is true when relatively many participants are inactive.

Pension plans assumptions: the case of discount rate

2019 ◽  
Vol 32 (1) ◽  
pp. 36-49 ◽  
Author(s):  
Ana Isabel Morais ◽  
Inês Pinto
Keyword(s):  
Financial Reporting ◽  
Value Relevance ◽  
Pension Plan ◽  
Pension Plans ◽  
Rate Of Return ◽  
International Accounting ◽  
Defined Benefit ◽  
Accounting Standard ◽  
Content Type ◽  
Defined Benefit Plans

Purpose In 2009, the International Accounting Standards Board started revising International Accounting Standard (IAS) 19 to improve the requirements for managing the annual expense of a pension plan. The revised standard became effective in 2013. The purpose of this paper is to investigate what effect this revision had on managerial discretion. The paper also examines the implications of the revision on the value relevance of accounting information. Design/methodology/approach The authors use a sample of 72 firms listed on the FTSE 100 that have defined benefit plans for the period between 2009 and 2015. The authors use a regression discontinuity design to analyse the effect from the revision of IAS 19 on the choice of managers regarding the expected rate of return-on-plan assets. The paper also investigates whether firms with higher pension sensitivity are more likely to manage earnings upward before the revision of IAS 19. Further, the paper studies the value relevance of earnings after the revision of the accounting standard. Findings Consistent with predictions, the results show that the adoption of the revised IAS 19 limits the use of the expected rate of return on assets to manage the annual expense of defined benefit plans. This finding shows a sharp increase in the value relevance of earnings. Practical implications This finding is useful for users and preparers of financial statements and regulatory bodies as it identifies not only the influence of a change in the accounting standard for earnings management but also provides evidence on the consequences of managers’ discretion. Originality/value This paper provides direct evidence on the relationship between regulation and financial reporting discretion. It also provides evidence to accounting standard setters that the revision of IAS 19 improves the value relevance of financial information, which gives additional justification to the changes introduced by regulators.

scholarly journals Integrated risk management for defined benefit pensions: models and metrics

2014 ◽  
Vol 14 (2) ◽  
pp. 151-160 ◽  
Author(s):  
RAIMOND MAURER
Keyword(s):  
Risk Factors ◽  
Risk Management ◽  
Pension Plan ◽  
Pension Plans ◽  
Management Model ◽  
Risk Exposure ◽  
Defined Benefit ◽  
Integrated Risk ◽  
The Impact ◽  
Integrated Risk Management

AbstractThe Pension Benefit Guaranty Corporation (PBGC) insures private sector defined benefit (DB) pension plans, when an employer becomes insolvent and is unable to pay the pension liabilities. In principle, the insurance premiums collected by PBGC should be sufficient to cover potential losses; this would ensure that PBGC could pay the insured benefits of terminated pension plan without additional external funding (e.g., from taxpayers). Therefore, the risk exposure of the PBGC from insuring DB pension plans arises from the probability of the employer insolvencies; and the terminating plans’ funding status (the excess of the value of the insured plan liabilities over the plan assets). Here we explore only the second component, namely the impact of plan underfunding for the operation of the PBGC. When a DB plan is fully funded, the PBGC's risk exposure for an ongoing plan is low even if the plan sponsor becomes insolvent. Thus the questions most pertinent to the PBGC are: what key risk factors can produce underfunding in a DB plan, and how can these risk factors be quantified? We discuss the key risk factors that produce DB pension underfunding, namely, investment risk and liability risk. These are interrelated and must be considered simultaneously in order to quantify the risk exposure of a DB pension plan. We propose that an integrated risk management model (an Integrated Asset/Liability Model) can help better understand DB pension plan funding risk. We also examine the Pension Insurance Modeling System developed by the PBGC in terms of its own use of some of the building blocks of an integrated risk management model.

scholarly journals Promoting work at older ages: the role of hybrid pension plans in an aging population

2004 ◽  
Vol 3 (3) ◽  
pp. 315-337 ◽  
Author(s):  
RICHARD W. JOHNSON ◽  
EUGENE STEUERLE
Keyword(s):  
Older Adults ◽  
Population Aging ◽  
Later Life ◽  
Work Capacity ◽  
Pension Plans ◽  
Defined Benefit ◽  
Defined Benefit Plans ◽  
Private And Public ◽  
Changes Over Time ◽  
The Impact

Employers are beginning to search for ways to elicit more labor supply from older adults as the population ages, the ability to work in later life increases, and younger workers become relatively scarce. Many employers are turning to hybrid pension plans, such as cash balance plans and pension equity plans. Whereas traditional defined benefit plans often subsidize workers who retire early and penalize those who remain at work beyond the plan's retirement age, most hybrid plans reward work at older ages. This paper documents the impact of population aging on the labor market and changes over time in work capacity at older ages. It then shows how movement toward hybrid pension plans, among other types of private and public retirement plan reforms and redesigns, can be used to increase work incentives for older adults.

Getting More from Less in Defined Benefit Plans

2018 ◽  
Author(s):  
Daniel W. Wallick ◽  
Daniel B. Berkowitz ◽  
Andrew S. Clarke ◽  
Kevin J. DiCiurcio ◽  
Kimberly A. Stockton
Keyword(s):  
Interest Rates ◽  
Pension Plan ◽  
Defined Benefit ◽  
Portfolio Risk ◽  
Defined Benefit Pension Plan ◽  
Increased Risk ◽  
Investment Returns ◽  
Defined Benefit Plans ◽  
Asset Class ◽  
Reduced Costs

As global interest rates hover near historic lows, defined benefit pension plan sponsors must grapple with the prospect of lower investment returns. We examine three levers that can enhance portfolio outcomes in a low-return world: increased contributions; reduced investment costs; and increased portfolio risk. We use portfolio simulations based on a stochastic asset class forecasting model to evaluate each lever according to two criteria: the magnitude of impact and the certainty that this impact will be realized. We show that increased contributions have the greatest and most certain impact. Reduced costs have a more modest, but equally certain impact. Increased risk can deliver a significant impact, but with the least certainty.

The Potential for Inflating Earnings through the Expected Rate of Return on Defined Benefit Pension Plan Assets

2011 ◽  
Vol 25 (3) ◽  
pp. 443-464 ◽  
Author(s):  
Brian Adams ◽  
Mary Margaret Frank ◽  
Tod Perry
Keyword(s):  
Financial Reporting ◽  
Asset Allocation ◽  
Cumulative Effect ◽  
Pension Plan ◽  
Pension Plans ◽  
Rate Of Return ◽  
Defined Benefit ◽  
Operating Income ◽  
Defined Benefit Pension Plan ◽  
Reported Earnings

SYNOPSIS Using a sample of firms over the period of 1991 through 2005, we examine the opportunity that exists for firms to inflate earnings through the expected rate of return (ERR) assumption associated with defined benefit pension plans. The evidence suggests that, on average, the ERR is not overstated relative to several benchmarks, including contemporaneous actual returns, historical cumulative actual returns, and expected future returns based on asset allocation within the pension. We also find that actual changes in the ERR are infrequent and typically have less than a 1 percent impact on annual operating income. We also estimate that a 0.5 percent change (50 bps) in the ERR will result in a cumulative effect on operating income over a five-year period of approximately 0.5 percent or less for the majority of firms. When we examine firms with the highest ERRs or with the greatest opportunity to inflate earnings, again, we find that the ERR is not overstated relative to several benchmarks. Although we do not observe pervasive inflating of reported income through the ERR during our sample period, we do find that for some firms, small increases in ERR can have a material impact on reported earnings. Our results provide evidence related to the pervasiveness, materiality, and impact of overstated earnings through the ERR, which helps regulators assess the costs and benefits of eliminating this discretion in financial reporting.

Retirement and Pensions in American Economic History

2018 ◽  
pp. 354-374
Author(s):  
Robert Clark ◽  
Lee A. Craig
Keyword(s):  
Public Sector ◽  
Private Sector ◽  
Economic History ◽  
Pension Plans ◽  
Federal State ◽  
Defined Benefit ◽  
Retirement Plans ◽  
The Us ◽  
Defined Benefit Plans ◽  
State And Local

The proportion of the US population that survives to retirement age has increased over time, as has the share of the older population that retires. Higher incomes at older ages explain the increase in the incidence of retirement. Pensions provide much of that income. In general, public-sector workers, especially military personnel, were covered by pensions before their private-sector counterparts, and coverage in the public sector remains more widespread, and generous, than it is in the private sector. Public-sector pension plans are more likely to be defined benefit plans than are private-sector plans. Many public-sector employers have promised their employees more in benefits than they have set aside to pay for those benefits. Estimates suggest that the federal, state, and local retirement plans currently in operation are underfunded by as much as $5 trillion.

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