Defined Benefit Plans Research Articles

Optimal Structure of Pension System and Its Influence on the Social Policy of State Budget

The world is witnessing an important increase in number of elderly people. This process is accompanied by the increase of the proposition of working and retired population, which has significant economic, social and political implications. To answer these challenges, the governments across the world engaged in comprehensive reforms of social policies, out of which the reform of pension system is the most important. The presented research aims to determine the main directions of pension reforms undertook by different countries. More precisely, the objective is to identify the trends characterizing reforms in developing countries and compare them to the tendencies observed in the reforms of developing economies. Therefore, the aim of research is to get generalized results, which will contribute greatly to the existing scientific literature and will be useful in the process of perfecting and improving the current pension reform. To do so, the paper studies reforms together with the existing scientific literature and public reports issued by international organizations. The results of the study suggest that the most common pension system across the globe implies introduction of the accumulated pension model (Defined Contribution Plan) instead of solidarity pension scheme (Defined Benefit Plan). This is a radical change impacting country’s economy, social and cultural norms and legislation. The reason behind the reform was the limitation of the existing model, but also the demographic trend of aging the population.

ANALISIS AKUNTANSI PROGRAM MANFAAT PENSIUN PADA ENTITAS TANPA AKUNTABILITAS PUBLIK

This study aims to review the practice of accounting application of pension programs in entities without public accountability. This research uses the object of pension program implemented by Waroeng SS. The research method used in this study using qualitative methods. The study was conducted during the period of March-June 2018. Interviews to informant was conducted on the second week of May 2018. The selection of informant was based on the knowledge capabilities associated with the information in this study. The informant in this research is the financial staff of Waroeng SS. This study concludes that the retirement / pension benefit accounting policy in Waroeng SS is implemented through a defined benefit plan that is independently managed by the internal Waroeng SS or can be referred to by the employer's pension fund. There are differences in the recording of liabilities on pension plans implemented by Waroeng SS and SAK ETAP Chapter 23 (2009). Furthermore, the pension fund managed by Waroeng SS which is still one with the management of the SS waroeng is contrary to regulations concerning pension funds, but does not conflict with SAK ETAP because SAK ETAP does not regulate related to the separation of funds between management and pension funds

Rethinking the Structure of Teacher Retirement Benefits: Analyzing the Preferences of Entering Teachers

Most U.S. public school teachers participate in defined benefit retirement plans, which base benefits on years of service and their last few years of salary. These plans are often backloaded and include sharp economic incentives. We consider the implications of transitioning to a cost-equivalent defined benefit plan under which teachers would earn benefits more evenly across their careers. We show that new teachers who are risk averse would prefer the alternative plan. The magnitude is often substantial. For example, for an entering teacher the certainty equivalent for the CB plan is about 2.1 times the certainty equivalent for the respective FAS plan in New York City and 29 times larger than the respective heavily backloaded FAS plan in Philadelphia.

Implied Discount Rates for the U.S. Military Blended Retirement System

We evaluate the 2018 option for U.S. military service members to switch from the legacy defined benefit (DB) pension to the new DB/DC hybrid Blended Retirement System. We show that the required return on the pre-retirement matching and incentives in the new system is unrealistically high. Alternatively, those switching to the new system must anticipate a substantial improvement to the current levels of incentive Continuation Pay. We construct our own analysis and a calculator that takes a financial economics perspective missing from previous analyses of the decision as well as consider the positive attributes of the Blended Retirement System. We conclude that those facing the 2018 choice between the two plans should favor the current DB plan if they anticipate serving 20 years.

Analisis Perbandingan PSAK No. 18 Tahun 1994 dan Revisi 2010 Serta pengaruhnya Terhadap Laporan Keuangan

The purpose of the study was to determine the comparison between PSAK No. 18 (1994) and PSAK No. 18 (revised 2010), and the effect of PSAK No. 18 changes to the financial statements on PT. TASPEN. Changes in PSAK No. 18 Among other things, the scope of which is wider than the pension fund entities that are analogous to finish work because entering retirement age but completed work in accordance with the plan or contract work. Actuarial present value, is now calculated and reported using current salary levels or projected salary levels up to the time of Retirement attendees. Financial statements, for defined contribution plans and defined benefit plan is split into the separate financial statements. And the presentation of the fair value of investments at fair value. The authors conclude that, given that PSAK No. 18 (revised 2010) came into effect on January 1, 2012, the readiness PT. TASPEN (Persero) in applying PSAK No. 18 (revised 2010) should be considered to receive this new standard.

Supplemental Retirement Savings Plans in the Public Sector: Participation and Contribution Decisions by School Personnel

Virtually all full-time state and local government employees are covered by a retirement plan, typically a defined benefit plan, in which they are required to participate. In addition, most school employees have the option of choosing to contribute to a voluntary retirement savings plan offered by their school district. Relative to private sector workers, public employees face an expanded choice of retirement savings plans. Federal tax policies allow state and local governments the opportunity to offer both 401(k) plans and 457 plans to their employees. In addition to these plans, public schools and certain other organizations can offer 403(b) plans to their employees. This paper examines the decision to participate in a voluntary savings plan and the level of contributions for those that enroll in at least one of the plans. The analysis begins by describing the savings options available to public school employees and how these plans differ. The findings indicate that the same economic and demographic factors that influence saving decisions by private workers also drive the decisions of school employees. The three savings plans offered to public employees have many similar characteristics; however, several differences in the plans imply that certain workers may prefer one plan type over the others. Probit and Tobit models of participation in any plan and total annual contributions are estimated. Finally, we estimate the determinants of the decision to choose any one or a combination of savings plans.

Pension Plans and Retirement Insecurity

Why do we observe higher and higher retirement insecurity over the years? This paper argues that an individual’s retirement insecurity hinges on the interplay between her registered pension scheme and the level of market volatility. A pension scheme reflects the extent to which pension investment risk is individualized, providing the seed for retirement insecurity. The fear for retirement was triggered as capital markets became more volatile over the past decade. Market volatility creates an immediate information shortcut for individuals when forming expectations about post-retirement income that will only be realized in the long run. Due to the “available information bias,” citizens have developed overall downward expectations of retirement income under growing market volatility, forming pessimistic perceptions about retirement. This pessimism is more striking among those with a Defined Contribution pension scheme than those with a Defined Benefit plan because of the risk individualization feature. The argument is tested with data from the British Household Panel Survey (BHPS). The findings suggest that individuals’ perceptions of insecurity in post-working life are driven by the type of pension plan in which they are enrolled and the degree of market fluctuation facing them.

Central States Pension Fund: Investment Policy Decisions and Challenges Facing the Plan

Central States Pension Fund: Investment Policy Decisions and Challenges Facing the Plan

Practical Applications of White Label Funds: A No-Nonsense Design Handbook

Practical Applications Summary As defined benefit (DB) plans continue to give way to defined contribution (DC) plans in the US retirement landscape, white label funds offer plan managers a way to provide individual participants with the advantages of active management while fulfilling their fiduciary responsibility to pursue the best possible returns for the lowest possible fees. In White Label Funds: A No-Nonsense Design Handbook, published in the Spring 2017 issue of The Journal of Retirement, Rod Bare, Jay Kloepfer, Lori Lucas, and James Veneruso move beyond the common conception of white label funds as simple unitization vehicles to champion a customized structure that affords the greater pricing efficiency and rigorous governance of DB plans. The authors have compiled their insights into a how-to guide that lays out who should use such funds, what the benefits are, and the nuts-and-bolts of how to construct and manage them, using a hypothetical non-US equity white label fund as an example.

Golden Handcuffs and Corporate Innovation: Evidence from Defined Benefit Pension Plans

This study examines the relation between employee incentives and corporate innovation. We find that firms with a higher defined benefit (DB) pension value secure more patents and patent citations. We further show that pension freezes, which stop the accumulation of pension obligations, negatively affect innovation outcomes. The value of a DB plan influences innovation by motivating employees to produce higher output and through loyalty. However, pension deficits impede innovation because of the nature of inside debt. Overall, our findings call for a fresh look at pensions by policy makers and practitioners, given the historic shift away from DB plans.

Retirement Planning Decisions: Choices Between Defined Benefit and Defined Contribution Plans

As states move toward offering defined contribution retirement plans as an alternative or addition to traditional defined benefit pensions, they need to consider the preferences and long-term consequences for different groups of employees. This study looks at which plan employees choose when given the option of either a defined contribution or defined benefit plan. The strongest driver of that choice is education level where the most educated prefer defined contribution plans and the least educated stay in defined benefit plans. A unique contribution of this study is that we include region of origin as a study and determine that cultural differences influence plan selection. The study also explores the role of sex, age, and tenure. Challenging other studies on financial planning, these findings indicate that sex and age are not significant factors. This research was conducted using data from more than 4,000 employees from Florida International University and an interview with HR professionals. By understanding retirement preferences in a more nuanced way, we can better craft our approaches to retirement security and financial literacy training in public sector organizations.

Expected Benefit Payments and Asset Allocation in Defined Benefit Plans Post-SFAS 132(R)

SYNOPSIS We contribute to the literature examining defined benefit pension plan asset allocation in the post-SFAS 132(R) reporting environment. SFAS 132(R) requires firms to disclose the expected annual pension benefit payments, thus providing a direct way to measure pension plan payout horizon. Controlling for previously documented determinants of pension asset allocation, we find evidence that a payout horizon measure constructed from SFAS 132(R) disclosures is associated with the firm's pension investment decisions. Specifically, we document that firms with a greater proportion of pension obligations due in the short horizon allocate a smaller portion of their plan assets to equity investments. Additionally, we provide evidence that our proposed measure explains asset allocation over and above previously used proxies representing plan horizon, confirming the usefulness of the 132(R) mandated disclosures.

Coworker Influence on Annuitization Decisions: Evidence from Defined Benefit Plans

Coworker Influence on Annuitization Decisions: Evidence from Defined Benefit Plans

Millennials’ Retirement Saving Behavior: Account Ownership and Balance

Among the generations, the Millennials are the largest group in the United States. Compared with their parents and grandparents, the Millennials need to assume more responsibility to prepare financially for retirement. Few studies have analyzed this generation's retirement saving behavior. Using data from the 2013 Survey of Consumer Finances, this study examined the state of Millennials’ retirement savings, including retirement account ownership and balance. Results showed that only 37.2% of Millennials had any account designated for retirement. Among those with a retirement account, the average accumulated amount was $21,333. Factors that affected retirement saving behavior included age, education, total household income and assets, job tenure, self‐employment, having a retirement saving motive, having a defined benefit plan, overspending, and risk tolerance. This study provided insight that can help financial planners and educators, as well as policymakers, understand the Millennials’ current retirement savings behavior. Also, the results can help the Millennials engage in saving for their retirement.

Rethinking Limits on Tax-Deferred Retirement Savings in Canada

Tax rules limiting the amount of tax deferral available to Canadians in various retirement saving vehicles need some measure of equivalency among them. Since 1990 this measure has been the Factor of Nine, based on the proposition that saving 9 percent of annual earnings will let a person buy a retirement annuity equal to 1 percent of pre-retirement income. A quarter century later, the flaws in the Factor of Nine are glaring and the case for change is compelling. The Factor of Nine is the result of calculations based on one particular type of defined-benefit pension plan operating under one specific set of demographic and economic circumstances. It is a crude measure. It neglects features that can make wealth accruals under different defined-benefit plans larger or smaller. It affects people of different ages differently. And it is badly out of date. People are living longer and – even more important – yields on investments suitable for retirement saving are very low. These changes have raised the cost of obtaining a given level of retirement income. The unchanged factor specifying equivalency puts people saving in money-purchase arrangements such as defined-contribution pension plans and RRSPs at a major disadvantage relative to people in defined benefit plans. Three types of reforms could alleviate problems with the Factor of Nine: • Update the assumptions underlying the Factor of Nine to reflect current economic and demographic realities; doing that would raise the current annual tax-deferred savings limit from its current 18 percent to a number around or even exceeding 30 percent. • Level the playing field for tax-deferred saving by refining the factors so that they escalate with age and/or reflect differences in pension plan design. • Replace the current annual tax-deferred saving limits for defined-contribution pension plan participants and RRSP savers with more generous regimes: either index unused contribution room for inflation or, more farsightedly, establish an inflation-indexed lifetime tax-deferred savings limit that will permit all savers to achieve pension wealth equal to that of participants in relatively comprehensive defined-benefit plans. Inaction over another quarter century would be unconscionable. Canadians continue to live longer. Slower world growth and high saving will likely depress real returns for decades. Taxes deferred when people save for retirement get paid once people are retired. Canadians who do not participate in public-sector pension plans should have more opportunities to save, and unfair tax treatment should not stand in their way.

Employees' risk attitude and corporate risk taking: Evidence from pension asset allocations

Do labor characteristics matter to corporate decisions? We answer this question by examining whether firms consider the risk attitude of rank-and-file employees in investing the pension assets of defined benefit plans. We construct a direct measure of employees' risk attitude from their defined contribution pension portfolio allocations. We find that firms with more risk-averse employees exhibit higher sensitivity to their own default risk in their defined benefit pension investment. The reduction in pension risk taking induced by sponsor risk is more pronounced for low R&D firms, and in the period with stringent pension regulation. We further show that sponsors consider employees' risk aversion in making pension investment decisions regardless of the power of labor union. Overall, our findings suggest that firms incorporate employees' risk attitude into corporate policies.

Cost of Equity, Pension Intensity Risk and Audit Quality: An Empirical Examination of Their Relations

Prior research documents that markets efficiently impound pension plan risk into a defined benefit plan’s market value. This study adds to these prior works by investigating how audit quality affects the pension risk – cost of equity relation. Using proxies to measure pension intensity, and audit quality, we document that audit quality attenuates the positive relation between a sponsoring firm’s cost of equity and the scaled magnitude of the firm’s pension intensity risk. We rationalize these findings by asserting that the positive relation between a defined benefit plan firm’s cost of equity and pension intensity reflects increased financial risk associated with higher pension obligations but the quality of the auditor reduces this risk.

Corporate pension plans and investment choices: Bargaining or conforming?

This paper investigates the impacts of defined-benefit (DB) pension plans on the corporate investment choices between diversifying and non-diversifying investments. We find a firm's DB plan coverage is negatively associated with its propensity of making a major investment. Subject to a major investment decision, however, the firms with higher DB plan coverage is more likely to diversify, i.e. acquire firms abroad or in other industries, rather than invest in fixed assets or make non-diversifying (i.e. domestic horizontal) acquisitions. Moreover, in diversifying acquisitions, they are more likely to invest in countries or industries with strongly unionized workforce. Further analysis on post-investment performance shows that firms with higher DB plan coverage experience a greater improvement in operating profitability after a diversifying acquisition, and the improvement mainly comes from a higher asset turnover rather than cost reduction. On the other hand, DB plan sponsoring firms experience a decline in profitability after a large capital expenditure or a non-diversifying acquisition. We propose both bargaining motive and conforming motive can explain these results.

Strengthening Retirement Outcomes for DB Plan Participants

The retirement outcomes for defined benefit (DB) plan participants can be significantly impacted by the plan sponsors’ plan design choices, as well as by the decisions made by participants. This is true when a plan sponsor is seeking to transfer its risk or when participants retire from an ongoing plan. For DB plans whose plan design allows for a lump sum form of benefit, or those who are offering one through a special lump sum window, the guaranteed income benefit that was synonymous with the earliest pension plans will likely be lost in favor of the lure of a one-time lump sum payout to participants. What many pensioners don’t realize—often until it is too late—is that when they accept a lump sum distribution, they run the risk of prematurely depleting their assets. With a lump sum, the pensioner becomes responsible for managing the investment and addressing the market and longevity risks that are traditionally assumed by the plan or, in the case of a pension risk transfer, the insurer. This article will outline practical ways that DB plan sponsors can reduce pension risk and simultaneously enable the retirement outcomes intended for the plan through partial annuitization, and other lifetime income options. It also offers plan sponsors insights on how to develop clear and complete education and communication with income-oriented framing or positioning.

For teachers, a better kind of pension plan

Public school teachers deserve a compensation system that puts them on a secure path toward retirement. The severely backloaded structure of today’s public school teacher pension systems benefit only a small proportion of entering teachers while putting the rest on an insecure retirement path. But there is a cost-neutral solution to this problem that would benefit most teachers entering public school classrooms today without removing any of the protections from the stock market with which teachers have become accustomed. Teacher pensions could be restructured so that teachers earn retirement wealth in relatively equal intervals throughout their careers. The author calls these Smooth Accrual Defined Benefit plans.