This is usually referred to as the actuarial accrued liability. It is that portion of the actuarial present value of all future benefits (PVFB) that is assigned by the actuarial method to the period prior to the valuation date. present value of all future benefits is the present value of all benefits accrued and unaccrued, past and future. It is a measure of the total obligations of the plan, past and future. That portion assigned to the past is called the actuarial accrued liability. This concept will be discussed again later in the section on actuarial methods. Due to the wide variety of actuarial methods in use, the same plan and assumptions can generate Significantly different actuarial accrued liabilities. In fact, one commonly used method (Aggregate Actuarial Cost) produces a zero actuarial accrued liability by definition. It funds costs over future payrolls only. (more…)

There are two traditional ways to value pension plan assets, i.e., market value and book value (cost). The actuary has always been skeptical about using market value due to the frequency of large short-term swings in security prices. In order to use market value properly, the actuary should value the liabilities at market also, which implies changing the interest rate assumption each year to meet the changing condition of the securities marketplace. This approach is, in fact, what is encouraged by FASB No. 35, which requires market value of assets to be used for disclosure purposes. There is an illusion of accuracy connected with market values because of the assumption that securities could be converted to cash at published prices. In fact, it is questionable whether any large fund could be liquidated with rapidity and if many tried to do so simultaneously, the entire securities market would collapse. (more…)

The conventional approach to pension asset management and asset allocation in retirement assumes that one pool of invested pension assets should be regarded as a single portfolio (although possibly with multiple investment managers) having a single level of risk tolerance and acting as an offset to a single pool of pension liabilities. However, the estimated magnitude of the pension liabilities is something less than precise and establishing investment objectives to meet such an uncertain target is not easy. Some corporations have met this problem by making distinctions among the liabilities and offsetting each pool of liabilities with a separate portfolio with appropriate risk and return objectives. (more…)

A company may terminate an employee benefit plan. However, a plan qualified for favorable tax treatment under the Internal Revenue Code must provide that, in effect, each affected participant becomes fully vested in his accrued benefit at the time of termination. ERISA also provides that, for defined benefit plans, the Pension Benefit Guaranty Corporation (PBGC) must be notified. (more…)

Older workers of today are healthier, better educated, more highly skilled, and a larger proportion of the labor market than in any previous era. Yet, many employers continue to view older workers through a lens distorted by negative stereotypes that developed during the early days of the industrialization process. High rates of unemployment and a sense that human capital, developed in early adulthood, should be sufficient to see workers through their careers made “shedding” older workers a seemingly affordable solution. The long-term costs of that “solution” are now being realized, not only in terms of the pension liabilities that encumber the finances of firms, but also in terms of the organizational loss that occurs when senior workers disappear. (more…)

Determining the characteristics of a corporate pension plan falls roughly into two parts:

1. What total compensation package can the company afford?
2. Given this constraint, what employees will be covered and what benefits will they receive?

The answer to the question of what the company can afford requires a balancing of the long-term interests of the shareholders and the employees. (more…)

TIAA also offers the TIAA Real Estate Account. This option has been available since the fall of 1995. Although offered by TIAA, the Real Estate Account is a variable annuity. As one would expect, the Real Estate Account invests about 70 to 80% of its assets in real estate, with about 20% to 30% invested in bonds and money market instruments to provide short-term liquidity. Unlike the TIAA Traditional Annuity, TIAA Real Estate Account does not guarantee a return. (more…)

Classification of Pension Plans

There are two main criterions to distinguish Pension Plans. The first criterion is the asset base for the liabilities for benefits promised to plan participants or employees:

1. Pension plans without a fund ( pay as you-go plans)
2. Pension plans with a fund (funded pension plans). (more…)

The lower age boundary defining “older worker” seems to depend on the context. Much of the retirement literature uses age 65 and older to define this category, a choice that reflects the salience of age 65 in previously enforced policies of mandatory retirement and entitlement for full Social Security benefits, as well as the general usage of the 18-to-64 age range in defining the “prime age” workforce. Within this context, “older worker” referred to someone whose continued attachment to the labor force ran counter to the normative pattern of retirement; by working beyond the “normal” retirement age of 65, these workers were considered categorically different from those who eschewed the option of “early” retirement. (more…)

There is a huge debate if management of pension plan should be separated or integrated with the organization that sponsoring them. In some of popular pension funds, they were run separately from sponsoring organization. In other some pension funds in the market, it is still managed as if a part of the sponsor. (more…)