Defined Benefit Plans Research Articles

Employee Benefits Disclosure: Recent Evidence from Bangladesh

This study explores the extent of employee benefits disclosure and short-term and long-term employee benefits plans maintained by the Bangladeshi companies. An employee benefits disclosure index and a form for collecting data about long-term and short-term employee benefit plans maintained by the companies are created and descriptive statistical analysis is applied to the collected data. The extent of employee benefits disclosure in Bangladesh is low. However, disclosure practice is not consistent across all the categories. Disclosure is very poor under IAS 19 Employee Benefits and companies do not provides any disclosure under IAS 26 Accounting and Reporting by Retirement Benefit Plans. Compliance and disclosure under local regulations in Bangladesh are very good. Recognized provident fund and gratuity fund are the two most common long-term employee benefits provided by the companies and they are sharing profits with their employees. But companies don’t provide any detailed disclosure regarding other short-term employee benefits and defined benefit plans. The disclosure pattern of foreign companies is far better than that of domestic companies. Relevant authorities should take the necessary step to ensure full compliance with disclosure provisions of IAS 19 as well as IAS 26 and encourage them to provide detailed disclosure regarding short-term employee benefits.

Do State and Local Government Employees Save Outside of Their Defined Benefit Plans When They Need To?

As state and local policymakers enact benefit cuts to reduce the cost of their pension systems, the life-cycle model suggests that workers will adjust by saving more on their own. But, whether workers actually respond to pension characteristics remains an open question. After all, income received far in the future may not be salient to young workers deciding how much of their earnings to consume in the present. To answer the question, this paper links the Survey of Income and Program Participation to the Public Plans Database and explores whether state and local workers consider the amount of their pension savings, the funded status of their plan, or their Social Security coverage when deciding whether to participate in a supplemental defined contribution (DC) plan. The paper found that: • Employees whose pensions provide less income are more likely to participate in a supplemental DC plan, but the effect is small. • Members of poorly funded pension plans are not more likely to participate in supplemental plans than members of well-funded plans. • Employees without Social Security coverage are not compensating with greater participation in supplemental plans. The policy implications of the findings are: • If state and local employers are forced to further curtail their pensions, employees are unlikely to replace that income with outside savings. • In the event that poorly funded pension plans end up reducing retirement income for current employees, those employees are unlikely to have been saving more in anticipation. • In short, states and localities – especially those whose workers are not covered by Social Security – should not count on outside savings to replace pension income.

Setting Realistic Goals for Personal Retirement Planning via Micro–Macro Analyses

The vulnerability of individuals planning for retirement has been growing as a result of the conversion from defined benefit plans to defined contribution plans, the steady increase in life longevity, and the uncertainty of asset returns under an ever-changing global environment. A serious problem is the lack of appropriate planning for retirement. How much should an individual in the United States save beyond the Social Security tax to maintain a reasonable lifestyle after retirement? The article designs a framework to facilitate the process of setting realistic goals for retirement planning, featuring the concept of agent-based simulations. Focusing on policy-rule-based investment strategies, the simulation framework includes multiple investable asset categories and explores dynamic allocation based on the investor’s age, current salary, and Social Security accumulation situation. Empirical results demonstrate a stylized application of the planning framework. TOPICS:Long-term/retirement investing, pension funds, portfolio management, retirement, Social Security Key Findings • Demonstrates the advantages of agent-based simulation models for addressing the survivability of pension plans. • Compares dynamic and adaptive strategies for integrating saving and investment decisions. • Provides a clear example of goal based investing for individuals and for institutions such as the U.S. Social Security System.

Coworker influence on annuitization decisions: Evidence from defined benefit plans

We investigate the role of coworker influence on an individual's annuitization decision. Using rich data on payout options and decisions in defined benefit plans, we find that past payout choices of coworkers significantly affect an employee's decision to annuitize at retirement and that the coworkers’ payout choices have a larger economic effect on annuitization than recent stock market returns. We also find that coworker effects are greater for employees who have a similar level of benefit amounts, those who share geographic proximity (same ZIP code), and those who retire at a norm (modal) retirement age of their workplace. Robustness tests show that estimated coworker effects are unlikely to be driven by unobserved common environments or similar preferences.

Financial Actuarial Assumptions: Empirical Study of How Brazilian Companies Manage Their Defined Benefit Plans

This study investigates the factors that Brazilian companies use to manage their defined benefit plans, specifically the determinants of the three financial actuarial assumptions: discount rate, expected return on assets and compensation growth rate. The focus of this research is the companies listed on the B3 – Brazilian Stock Exchange - that recognized and disclosed, from 2010 to 2017, post-employment benefit characterized as Defined Benefit (DB). The sample containing 296 firm/year was divided into two subgroups considering the firm’s political connections. The results suggest that politically connected companies are less effective in managing the solvency of funds or, according to Kido, Petacchi and Weber (2012) act intentionally to justify the company's financial stress. The year before the elections proved to be the most relevant period of discretion, while the specific year of the electoral election only influences the determination of the actuarial financial premises in politically connected companies and, just like in Naughton, Petacchi and Weber (2015) the manager acts to improve the solvency (reduce the deficit) of the pension fund in these periods. The hypothesis that politically connected companies have an incremental adjustment in actuarial assumptions in electoral years has shown results consistent with the theory suggesting that this group of companies manages the reduction of the actuarial deficit in election times more incisively

Do Socially Responsible Firms Walk the Talk? CSR Performance and Defined Benefit Pension Policies

This study examines whether socially responsible firms are more likely to have well-funded employee pension programs. It also examines the relationship between corporate social responsibility (CSR) performance and management discretionary choice of pension accounting assumptions. Signaling theory suggests that managers use CSR performance as a credible signal of firms’ commitment to engage in socially responsible business practices to the stakeholder. Correspondent inference theory suggests that the stakeholder attributes CSR performance to firms’ reputation of serving the interests of stakeholder. To protect their reputation, firms must take actions that are consistent with the signal they send via firms’ CSR commitment. Maintaining responsible employee pension policies is a socially responsible action because the defined benefit plan is voluntary and employers have to bear greater investment risk and cost associated with the plan than the alternative retirement plan. Using panel data of 13,099 firms-years across 1,428 U.S. firms from 1992 to 2015, this study finds that firms with higher CSR scores are less likely to have underfunded pension and they report higher pension net assets than their counterparts. More socially responsible firms also adopt more responsible (i.e., conservative) pension accounting assumptions (discount rate and rate of compensation increase) to compute estimated pension benefit obligations.

Financial Advice, Plan Choice, and Retirement Plan Satisfaction

Most private sector employees have access to defined contribution retirement plans while public sector employees often may choose defined benefit or defined contribution plans. This research utilized a survey of faculty to analyze retirement plan satisfaction. Advice from a financial planner was positively associated with satisfaction with portability. Retirement plan knowledge was negatively associated with satisfaction with the decision period. Selection of a defined benefit plan was positively related to four aspects of satisfaction and negatively related to regret. Financial planners assisting individuals who face such choices should acknowledge the decision's challenges and evaluate the client's level of retirement planning knowledge. Focusing on long-term goals and the client's investment and mobility risk tolerance may be helpful, especially after market corrections.

The Determinants of Public Pension Debt in U.S. States

State and local governments across the United States of America (USA) were hit hard by the recent recession. The fiscal stress alerted the public to the increasing amount of public pension debt for which, despite snowballing levels of pension debt, the causes are unclear. This article examines the factors contributing to annual changes in unfunded public pension ratios, focusing in particular on public pension management (including investment performance, investment assumptions, and accounting practices). The data on pension debt for state defined benefit plans comes from the Pew Charitable Trusts for the period 2005 to 2015. Two methods (random-effects and general estimating equation) were used to verify the consistency of the results. These results showed that investment return decreases the annual change in the public pension debt while using a project unit credit method, and the implementation of the Government Accounting Standards Board (GASB) Statement 67 increase the annual change in the public pension debt. These findings illustrate the importance of public pension management in explaining public pension debt.

Distributions to Beneficiaries of Tax-Favored Retirement Plans, before and after the Secure Act

Individual beneficiaries of tax-favored retirement plans have long enjoyed substantial tax deferral by spreading required minimum distributions (RMDs) over their lifetimes or life expectancies. Often referred to as “stretch” distributions, these extended RMDs attracted the attention of reformers who questioned whether the deferrals served the needs of retirees, or were merely estate planning tools. The result of that concern was the enactment of the SECURE Act of 2019 that significantly changed the treatment of retirement plan distributions to beneficiaries. The SECURE Act primarily targets non-annuity RMDs made to designated beneficiaries from tax-favored retirement plans that are defined contribution plans (but including IRAs). The SECURE Act eliminates life expectancy RMDs for many if not most of these beneficiaries and instead requires distribution of the entire amount of the retirement benefit before the end of the calendar year containing the tenth anniversary of the participant’s death (the ten-year rule). The SECURE Act, however, preserves life expectancy RMDs for “eligible” designated beneficiaries. Eligible designated beneficiaries (EDBs) include only (1) the surviving spouse of the participant, (2) a minor child of the participant, (3) a disabled individual, (4) a chronically ill individual, or (5) an individual who is not more than ten years younger than the participant. The determination of whether a designated beneficiary is an EDB is made as of the date of death of the participant. The SECURE Act also helpfully replaces the old five-year distribution rule with the ten-year rule, even for designated beneficiaries who are not EDBs, i.e., for those who are ineligible designated beneficiaries (IDBs). The ten-year rule also applies now to beneficiaries who succeed to plan benefits upon the death of an EDB. Unfortunately, though, beneficiaries who succeed to plan benefits upon the death of an IDB must still distribute all the remaining benefit within the same period that was applicable to the IDB. Beneficiaries that are so-called “see-through” trusts have long been afforded special RMD treatment. Now, however, the possibility of making life expectancy distributions to such a trust may be lost if any of the trust beneficiaries are IDBs. The SECURE Act partially addresses this problem by providing for “applicable multi-beneficiary trusts” that can allow a trust for a disabled or chronically ill beneficiary to still take RMDs over the beneficiary’s life expectancy. The SECURE Act also applies to commercial annuities purchased by tax-favored retirement plans that are defined contribution plans (including IRAs). These plans may now purchase lifetime and period certain annuities only for EDBs. Such annuities purchased for IDBs would normally conflict with the required application of the ten-year distribution rule. Fortunately, the SECURE Act does not apply to traditional defined benefit plans. Stretch annuities are still available under such plans even for IDBs. These annuities may provide unreduced payments for a period certain, and may allow significant increases over time in the amount of an annuity payment. It is true that joint and survivor annuity payments may be limited in amount for beneficiaries more than ten years younger than the deceased participant. Nevertheless, the payments may be as much as 52 percent of the payments to the participant for even the youngest of beneficiaries (with a higher percentage for older beneficiaries).

Room to Thrive: Why Principles-based Standards Make Sense for Regulating Contingent Pension Plans

As membership in traditional defined-benefit pension plans declines, plans in which benefits are contingent on the financial status of the plan are becoming more common. Rather than placing all the risk on sponsors to deliver guaranteed benefits to members, these contingent pension plans require members to take on at least some of the risk that benefits may or may not meet expectations. This E-Brief focuses on two types of contingent plans, target-benefit plans and multi- employer pension plans. These plans offer a different promise than traditional defined-benefit plans and the contract with plan members is different. This needs to be reflected in how they are regulated. Regulators should adopt a principles-based approach to financing-related standards, while using a rules-based approach for aspects such as governance and member communication. Principles-based regulations focus on desired outcomes rather than processes. Most contingent plans have members materially involved in the running of the plan, involved in making all key decisions, which makes principles-based regulations particularly well fitted. Plan governors would have more flexibility in how they manage the financing risks, rather than having to comply with generic rules that attempt to work on a universal basis. The streamlining of rules and an emphasis on objectives promote compliance, and enhance the ability of regulations to achieve their desired outcomes.

The Shifting Ground of Pension Design: Reflections on Risks and Reporting

Debates about the relative merits of defined-benefit (DB) and defined-contribution (DC) pension plans have been a prominent part of pension discourse over the past forty years. The intensity of the debate has ebbed and flowed over the years but has been more intense in recent years as there has been a shift from DB to DC plans in Canada. This shift has left the remaining members of DB plans feeling threatened and, for many, the sense of threat has been compounded by the emergence of target-benefit (TB) plans. Discussions of DB, TB and DC in the abstract tend to obscure basic issues related to the similarities and differences among these plans that should be taken into account. My hope is to provoke an examination of some of these issues free from the hyperbole that is widely invoked in partisan debates about DB and DC. In both the private and public sectors, I hope this would lead to the exploration of ways to limit the financial risks of a workplace pension plan (WPP) without going to pure DC. I will also note some measures that will help make DB plans more transparent. Basically, I will argue that: 1) There is so much diversity in the design of DB and DC plans that generalizing about the merits of DB versus DC has little precise meaning. 2) While DB plans generally go further than DC plans in achieving a predictable gross replacement rate (the ratio of retirement income to pre-retirement earnings), they will give rise to a variety of net replacement rates (taking into account factors like taxes and mortgage payments) and may push pre-retirement living standards below post-retirement levels. Net replacement rates come closer to defining living standards than do gross rates. 3) The financial and economic circumstances of the early 21st century have been difficult for all types of pension and retirement savings plans and I will focus on the impacts on DB plans that explain the changes noted above. 4) The relative advantage of DB plans in providing predictable benefits stems from cross-subsidies among the members. These are not inherently problematic but transparency problems may arise because cross-subsidies are not identified and measured. 5) There are measures that plan governors can adopt that can help reconcile the (un)predictability of contributions and benefits and make DB plans more transparent. Finally, I argue that regulatory and tax policy can be adapted to facilitate more flexibility in plan designs.

Effect of debt tax benefits on corporate pension funding and risk-taking

PurposeThis study theoretically investigates the impacts of tax benefits on funding level and risk-taking of a corporate defined benefit (DB) pension plan.Design/methodology/approachThe present value of the future tax benefits is maximized while the stockholders determine the funding level and investment risk-taking in DB plans. As a feature of DB plans, this study considers pension benefits to be pre-determined. Further, the pension beneficiary has a priority over the sponsor company's creditors for the pension reserve fund. These are seldom considered in previous studies.FindingsIt is desirable to decrease the funding level of DB plans to increase tax benefits. This is because the effect of tax exemption for the pension fund's investment income is eliminated by the change in the contribution arising from the investment's result. The optimal investment risk-taking depends on the funding level.Originality/valueThe impact of tax benefits on decision-making for DB plans is significantly different from that stated by previous studies, that is, an increase in pension funds will reduce the corporate debt. To explain corporate behavior, this study's results—derived from the essential feature of DB plans, which could not have been included in previous studies—should be considered.

Redistributive effects of different pension systems when longevity varies by socioeconomic status.

We propose a general analytical framework to model the redistributive features of alternative pension systems when individuals face ex ante differences in mortality. Differences in life expectancy between high and low socioeconomic groups are often large and have widened recently in many countries. Such longevity gaps affect the actuarial fairness and progressivity of public pension systems. However, behavioral responses to longevity and policy complicate analysis of possible reforms. Here we consider how various pension systems would perform in an OLG setting with heterogeneous longevity and ability. We evaluate redistributive effects of three Notional Defined Contribution plans and three Defined Benefit plans, calibrated on the US case. Compared to a benchmark non-redistributive plan that accounts for differences in mortality, US Social Security reduces regressivity from longevity differences, but would require group-specific life tables to achieve progressivity. Moreover, without separate life tables, despite apparent accounting gains, lower income groups would suffer welfare losses and higher income groups would enjoy welfare gains through indirect effects of pension systems on labor supply.

Retirement concerns and financial literacy in Brunei

PurposeDespite the inclusion of financial literacy in retirement studies, there are limited studies that look into retirement concerns and how financial literacy plays a role in managing retirement concerns. Understanding retirement concerns prior to retirement is important given how it affects retirement satisfaction. Therefore, this paper aims at assessing the retirement concerns in Brunei and the role of financial literacy in managing those concerns.Design/methodology/approach700 government employees, divided into three groups, were interviewed: Defined Contribution Plan (DCP) employees retiring in the next 10–15 years, DCP employees retiring in 20–30 years' time and Defined Benefit Plan (DBP) employees retiring in the next 10 years. Pearson's chi-square tests and logistic regressions were used to ascertain significant relationships.FindingsThe results indicate the relatively younger DCP group is more likely to be financially literate compared to senior groups however, these respondents are more inclined to focus on private home ownership at this juncture. The findings also indicate the importance of knowing how much to save for retirement towards determining those with an additional retirement plan, and consequently reducing their retirement concerns. The value of financial advice is also significant in determining the amount to save for retirement and in possessing an additional retirement plan.Research limitations/implicationsResults cannot be generalised to the population, as purposive sampling was utilised due to the absence of a population frame.Practical implicationsThe implications of the paper may provide value to policymakers to consider approaches to enhance the quality of financial advice and provide sound knowledge in computing the amount needed for retirement. Understanding the role of financial literacy vis-à-vis retirement concerns may also be useful for neighbouring countries with similar socio-cultural aspects such as Malaysia.Originality/valueGiven the limited research on retirement concerns and financial literacy, this paper is one of the few to emphasise on the importance of knowing how much is needed to save for retirement, in relation to retirement concerns. This may also be useful in other countries/communities with similar retirement context such as those with relatively low retirement planning or with similar retirement schemes. Further, with the 1993 pension reform, there is no known publication on retirement concerns and expectations in Brunei. Left unchecked, it may lead to poverty in old age and/or dependency on welfare institutions and family support.

Compensation and Benefits Survey 2019

Compensation and Benefits Survey 2019

Optimal Longevity Risk Transfer and Investment Strategies

Given the rising cost of maintaining defined benefit pensions, there has been a surge of activities in recent years by defined benefit plan sponsors to transfer their pension risk through strategies such as buy-ins and buy-outs. As buy-in and buy-out transaction pipelines grow, insurers actively participating in the buy-in and buy-out markets are exposed to significant longevity risk embedded in pension schemes. In this article, we investigate how to maximize a bulk annuity insurer’s value with reinsurance and/or longevity securities, subject to constraints that control longevity and investment risks as well as an overall risk. We apply duality and the martingale approach to derive an optimal longevity risk transfer strategy. Our results show that longevity risk transfer interacts with an insurer’s investment decision for value maximization. Our analysis also highlights the interdependence of different longevity risk management tools to achieve an overall risk target.

The Inevitable Rise in Dual-Income Households and the Intertemporal Effects on Labor Markets

The number of dual-income households has been steadily increasing over the past few decades. This study supports the hypothesis that given a household’s desire to remain above a minimum threshold standard of living, the rise in the number of dual-earner households is inevitable mostly due to inflationary pressures in product markets including rising housing prices and child care costs coupled with relatively flat wage trends. Mitigating uncertainty and risk associated with shifts in retirement plan offerings—moving away from defined benefit plans such as pensions toward defined contribution options such as 401(k) plans—was also cited as a factor contributing to the rising number of dual earners. This study highlights the costs and benefits of dual-earning decisions and the intertemporal implications for households, labor markets and overall societal welfare.

Labor Unemployment Insurance and Pension Asset Allocations

This paper examines the effect of unemployment risk on pension investment decisions of defined benefit (DB) pension plans. In particular, we examine whether unemployment insurance (UI) benefits result in increases in pension investment risk. Using fixed-effects and difference-in-difference analysis, we find evidence that firms take higher pension investment risk by investing more heavily in equities after unemployment insurance benefits increase. These results, which are robust to a number of sensitivity tests, are consistent with the notion that firms undertake more risk when the costs of unemployment decrease. In additional analyses, we find that changes in unemployment risk also affect other pension-related decisions such as earnings management using the expected rate of return on pension plan assets (ERR) and DB plan freezes.

Size and Investment Performance: Defined Benefit vs. Defined Contribution Pension Plans

Using a comprehensive sample of over 160 thousand U.S. private pension plans, we find significant economies of scale in investment performance and administrative expenses that are more prominent for defined benefit (DB) than for defined contribution (DC) plans. Small DB plans underperform size-matched DC plans and face the highest termination probability, and the majority of both types underperform passive benchmarks. Small plans and small sponsors prefer the DC structure more strongly than large ones do. Our results highlight the inefficiency of small DB plans, which is consistent with the secular shift toward DC plans and the recent trend of consolidation.

Using Expected Geometric Values to Calculate the Cost of Interest in Hyper-inflationary Environments: the Case of Venezuela

It is of vital importance to explore the relationship between pensions and inflationary levels because this forms a link between social policy and economic development in the context of Venezuela’s challenging economy and its impact on the development of pension systems. With such rampant inflation, companies must adjust the rates of salary increases to avoid a significant decrease in the purchasing power of income from defined benefit plans. Our research seeks to find the possibility of using an average geometric rate of future interest rates expressed as an expected value to discount obligations. Consequently, the cost of interest associated with the actuarial liability of the Benefit plans increases substantially in the next fiscal period to the actuarial valuation, sometimes compromising its sustainability over time. In order to minimize this problem, two scenarios for calculating the interest rate are proposed to smooth out this volatile effect; both are based on a geometric average with the expectation of working life or with the duration of the obligations. We are careful to use a reasonable interest rate that is not so high as to compromise the cash flow, resulting in skewed annual results of the companies. Our research seeks to find the possibility of using an average geometric rate of future interest rates expressed as an expected value to discount obligations. We formulate and actuarially evaluate two different scenarios, based on job expectations and Macaulay's duration, of the obligations that allow the sustainability of the plan in an environment of extremely high inflation. To illustrate the impact of the basic annual expenditure of the period, the results of an actuarial valuation of an actual Venezuelan company were utilized. Despite some companies adjusting their book reserves increasingly through a geometric progression, the amounts associated with the costs of interest would be huge in any such adjustment pattern. Therefore, we suggest adoption of one of the alternatives described in the research.