PENSION ACCOUNTING
Introduction
Pension plans basically refers to the strategies put in place by an organization to provide retirement benefits to their employees who have already attained the age for retirement. This plan is implemented by several organizations while others have reduced the funds allocated for pension plans but others have totally closed this pension plan program in their companies. The pension plan has thus shifted from the generous provision of the retirement profit which were initially provided in the 1970’s and in 1980’s into an arrangement that involved a defined contribution (Munnell and Soto 2007). However as the different organizations are changing their pension plans there are retirees whose retirement appreciations are sheltered from the changes experienced in the plan. Growth in pension plans has been extensively evidenced from the time when the Second World War took place and this has led to the great concern by managers, the government and finance regulators. The pension plan system is very crucial as it has an influence on the cash flow and income. Therefore there is need for investors to critically examine the pension plans before implementing them and before coming up with a conclusion.
Literature review
The pension plan funded condition over time.
The condition of the pension plan is referred to as the reasonable value of retirement arrangement assets minus the estimated liability or the projected profit obligation. The projected profit obligations are the actuarial current value of prospect retirement advantages given as a result of service offered to the last date and the profit given should base on assessed future occurrences such as revenue, death and compensation increase (Financial Accounting Standards Board (FASB) 1985). The current economic status usually determines the funded condition of pension plans since they devote their expenses on stocks and bonds. Hence with increase or reduction in the stock markets, results to either profit or loss in the pension plans material goods (FASB 1985).
Pension plan payment determinants
Factors such as the economic condition, organizations actual incentives and the regulatory constraint may influence an organization to either fund their pension plans fully or partially (Munnell and Soto 2007). There has been introduction of the defined contribution plans for instance the 401k plan which is a substitute of the definite pension profit in the 1980’s. Superior and big companies mostly has the defined pension plans as they have a more established workforce which requires them to even contribute to their older plans so as to cover up the benefits to the retirees (Munnell and Soto 2007).
The cost of the plan is determined by the organization of the employees as organized labor has unions which act as their spokesmen and they negotiate about the pension benefit on behalf of the employees. Thus it is difficult for any company with such kind of employees with their unions to manipulate the benefits by reducing the profits or freezing those benefits (Munnell and Soto 2007; Atanasova and Hrazdil 2010; Comprix and Muller 2011). The number of workers directly determines the cost of the pension plan, for instance the higher the number the higher the rate of pension payment. The financial limitation such as the level of power of an organization, determines the pension plan financial support (Duke and Hunt 1990; Press and Weintrop 1990; Asquith et al. 2005).
The relationships between changes in pension plan accounting principles and improved market valuation.
The work efficient market is found in economic literature and it refers to the market which changes rapidly with the advancement in information and technology. Markets are incompetent in incorporating the pension plan information as the market overvalues organizations with harsh underfunded pension strategy (Franzoni and Marín 2006). There exists a stronger relationship between pension plan funding intensity and the capital plan for an organization (Phillips and Moody 2003).
Hypothesis development
Three hypotheses are developed in pension plan which are tested to either be accepted or rejected.
- Pension plan funding status changes with time.
- There exist determinants which determine the pension plan contribution.
- There are relationships between changes in pension plan accounting principles and improved market valuation
Conclusion
It is quite evident that most companies are struggling with ways to provide retirement profits to their workers and how to source for funds for their pension plans. However, the grown up companies, those whose workers have unions, companies with expensive plans and those that with underfunding strategies usually contributes more to the pension plans. Organizations also contribute more when there are tax inducement and debt treaty incentives.
The pension plan funding condition is very crucial to the shifting market status, thus making it hard for organizations to manage the financial support of their plans even when they are careful about producing contributions. However there exist legal pension funding rules such as allowing the organization time to make up for funding underperformance.
Variation in the accounting averages as needed by the detained benefits pension plan strategy does not result in an improved evaluation by the company’s investors valuation as seen in the stock prices during the accounting average period. Inefficiencies in the implementation of pension plans is as a result of inability of market to put together information and to recognize future consequences associated with long-term obligations. Therefore markets are not at all efficient incorporating pension strategy information.
References
Atanasova, C. and K. Hrazdil (2010) “Why do Healthy Firms Freeze their Defined Benefit Pension Plans?” Global Finance Journal, vol. 21(3), p. 293-303.
Comprix, J. and K. Muller (2011) “Pension Plan Accounting Estimates and the Freezing of Defined Benefit Pension Plans,” Journal of Accounting and Economics, vol. 51(1-2), p. 115-133.
Financial Accounting Standards Board (FASB) (1985) Statement of Financial Accounting Standards No. 87: Employers’ Accounting for Pensions. Norwalk, CT: FASB.
Munnell, A. and M. Soto (2007) “Why are Companies Freezing their Pension Plans?” Center for Retirement Research at Boston College.
Phillips, A.L., and Moody, S.M. (2003) “The Relationship between Pension Plan Funding Levels and Capital Structure: Further Evidence of a Pecking Order,” Journal of the Academy of Business and Economics, January 2003
