Mental Model: Defined benefit pension plans

This is a dossier with resources and material regarding the valuation of defined benefit pension plans.

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research

Pension Plan Calculator (spreadsheet provided by aliactuary.com)

Actuarial Methods and Assumptions used in the Valuation of Retirement Benefits in the EU and other European countries

Defined benefit audit techniques –

Robert Meegan (Northeast) a

nd

Dave Harstein (Northeast), and Donna Prestia (CE&O), Reviewers

Stress Tests for Defined Benefit Pension Plans – A Primer – Gregorio Impavido

 

An Economist article on US public pension plans – Buttonwood

“Final salary pensions are a debt-like obligation, particularly in the public sector where the rights of pensioners are established in law (and even the constitution) in some states; there is an interesting case going on in Stockton, California, which may set the rights of creditors against those of pensioners. On corporate balance sheets, pension liabilities are discounted with a corporate bond yield. Falling bond yields have pushed up liabilities and widened deficits; hence many corporates have switched to defined contribution schemes. (Of course, the problem of low returns and falling rates dogs those schemes too, and are made worse by the low level of contributions that are made.)

This is NOT just a theoretical issue. If a company wants to offload its pension promise, or an individual wants to secure his pension by buying a fixed annuity, they find the cost has risen substantially.

But this doesn’t show up in the public sector. It uses the expected rate of return to discount its liabilities; since the expected rate of return is higher (7.5-8% is standard) than bond yields, it makes the liabilities look smaller, and reduces the apparent cost to taxpayers. The rationale for this approach is that pension funds can afford to take a long-term view and benefit from the returns on risky assets; contributions can be smoothed over the long term, avoiding any sudden jumps in employer (taxpayer) payments.”

Leave a comment

Filed under Accounting, Mental Models

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s