Pension Finance

Name: Pension Finance | Putting the Risks and Costs of Defined Benefit Plans Back Under Your Control
Brand: Wiley
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Putting the Risks and Costs of Defined Benefit Plans Back Under Your Control

M. Barton Waring(Autor*in)

Wiley (Verlag)

Erschienen am 13. September 2011

336 Seiten

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Beschreibung

Pension plans around the world are in a state of crisis. U.S. plans alone are facing a total accrued liability funding deficit of almost $4 trillion (of the same order of magnitude as the federal debt), a potential financial catastrophe that ranks among the largest ever seen. It has become clear that many government, corporate, and multi-employer pension sponsors will not be able to cope with this crippling debt and may default on promised benefits. And many of those sponsors that might be able to cope are exasperated by continuous, ongoing negative surprises-large unexpected deficits and higher-than-expected required contributions and pension expense-and are choosing to terminate their plans.
But it need not be so. Pension Finance: Putting the Risks and Costs of Defined Benefit Plans Back under Your Control walks the reader through the conventional actuarial and accounting approaches to financing pension benefits and investing plan assets, showing that the problems described happen as a natural consequence of the dated methods still in use. It shows in detail how modern methods based on market value will easily minimize these risks: Pension plans can in fact be comfortable for employers to sponsor and safe for employees to contribute todepend on for their retirement needs.
This book is must-read for defined benefit pension plan sponsors and employee representatives, plan executives, board members, accountants, fund managers, consultants, and regulators., Research sponsored by the CFA Institute, this book demystifies pension finance, previously accessible only to actuaries. It teaches the topic in lay terms by drawing complete analogies to ordinary transactions such as paying off a mortgage or saving for college. Armed with this book, anyone comfortable with finance and investments in any other context can be comfortable with pension finance and pension investment policy. And further armed with a handheld financial calculator, any layperson can quickly estimate the contributions needed to keep a given plan comfortably solvent, giving them a powerful tool for oversight.

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Inhalt

Intro
Pension Finance : Putting the Risks and Costs of Defined Benefit Plans Back under Your Control
Contents
List of Figures
List of Propositions
Foreword
Preface
Acknowledgments
CHAPTER 1 Achieving Long Term Health for Pension Plans Using Improved Managerial Accounting Tools
Perspectives on DB Plans
What Is Economic or Market Value Accounting?
What the Following Chapters Provide
CHAPTER 2 Today's Conventional Pension Finance Practices
Why Managers Need to Adopt the Economic Accounting Perspective
Where Are We Today?
The Accounting Always Follows the Economics
Historical Context: The Actuaries' Contribution to the Existence of Pensions
Conclusion
CHAPTER 3 Measuring Meaningful Present Values
What Is the Right Discount Rate to Use?
The Liability-Matching Portfolio: General Perspective
Risk-Free Rate vs. Expected Return on Assets
"If We Can Earn 7.5 Percent Per Year Over The Long Term": Happy and Unhappy Asset Return Distributions
The Employer's Experience
The Discount Rate Is in Fact the Same on Both Sides of the Full Economic Balance Sheet, But That Doesn't Mean That the Liability Changes Its Value with Changes in Investment Strategy!
GASB's White Paper and Public Employee Fund Discount Rates
Conclusion: Discount Rates
Appendix: Are There Market Values for Pension Plans?
CHAPTER 4 The Full Economic Liability: The Off-Book Starting Point for Management of Pension Costs
The Liability: Inherently an Economic Entity
A Newly Formed Pension Plan
Multiple Correct Measures of the Accrued Portion of the Liability but Only One PARENT Measure
Building a Pension Budget Identity
CHAPTER 5 Core Principles of Pension Accounting: The Full Economic Liability Meets Accrual Accounting and Normal Costs
Full Economic Normal Cost
Enter the Matching Principle: Normal Costs Accruing Over Time
Normal Costs and Retirees, Active Employees, and Future Employees
Allocating Pension Costs to Current Employees
Payment Patterns Other Than Level Payments
Illustrating Normal Costs and Accrued and Total Liabilities over Time
Comparing Normal Cost Methods
Normal Costs and Contributions: Multiple Measures?
Normal Cost and Agreed Levels of Benefit Security: An Accrual Method Not Reliant on the Matching Principle
Balance Sheet with Accruals of an Economic Measure of Periodic Normal Cost
Updating the Beginning-Period Pension Budget Identity
Summary of Discussion of Normal Costs
Appendix: Computing Level Payment Contributions and Normal Costs with a Handheld Calculator in Order to Gain Understanding of the Nature of the Problem
CHAPTER 6 Credit Risk and the Discount Rate
Two Useful Views of the Liability's Value
Termination and Default Risk
Conclusion
CHAPTER 7 Paying for the Plan
Pension Expense and Contributions
Other Components of Pension Expense in Addition to Normal Cost
Distinguishing Economic from Conventional Supplemental Costs
Strict Economic Pension Expense
Economic Pension Expense in an Accrual System
Contributions to the Asset Pool, and the Sponsor's Credit Risk
Investment Returns on Contributed Assets
Benefit Payments
The Components of Economically Determined Contributions
An Example Immediately Usable in the Boardroom: Analyzing Contributions for the Aggregate Plan with an HP 12c
The Volatility Of The Deficit Is Equal To The Volatility of Contributions
Conclusion
CHAPTER 8 Investment Strategy I: Liability-Relative Optimization
Investment Policy and Strategy for Investors with Liabilities
The Augmented Balance Sheet: Optimizing on the Combined Risks of the Sponsor and the Plan
Brief Review of the Theory of Surplus Return and Surplus Asset Allocation
The Elephant in the Strategic Asset Allocation Room
CHAPTER 9 Investment Strategy II: Managing Risks to the Plan's Surplus, to Pension Expense, and to Contributions Using the Liability-Matching Asset Portfolio
Show Me the Money: Risk Control Through the Liability-Matching Asset Portfolio
What Liability Should Be Hedged in the Surplus Asset Allocation Process?: Defining Capital Gains and Losses in the Accrued Liability
Hurdles to Adoption of Surplus Asset Allocation and to Holding an LMAP Portfolio: Why Isn't This Easier to Implement?
The Shape of Investment Strategy for Pension Plans Using Surplus Optimization and the Two-Fund Theorem
Conclusion
Appendix: Why Use Dual Durations in the Liability Measures?
CHAPTER 10 Investment Strategy III: Risk Tolerance and the Decision to Hold Risky Assets Over and Above the Liability-Matching Asset Portfolio
Why Hold Any Equities or Risky Assets?
Can the Sponsor Afford the Risk if It Happens? One Part of Identifying the Organization's Tolerance for Risk
Visualizing and Comparing Return/Risk Tradeoffs Among Alternative Investment Strategy Choices
Controlling Economic Risk to the Surplus Equals Controlling Accounting Risks to the Plan
Implementing a RAP in Addition to a Liability-Matching Portfolio
Benefits of Surplus Optimization and the LMAP When a RAP Is Held
Conclusion
Appendix: When Is a Plan Truly in Surplus?
CHAPTER 11 Investment Strategy IV: Asset/Liability Studies-The Conventional Approach
Traditional Actuarial Asset/Liability Studies
Modeling in the Traditional Actuarial Pension Approach
Possible False Correlations and Bad Investment Strategy Results
Do the Results Prove the Asset/Liability Method?
Managing the Present Value of Future Contributions through Investment Strategy
Conclusion
CHAPTER 12 A Retirement Party for the Required Rate of Return
Visualizing the Required Rate of Return
The Effect of Investment Risk on Surplus Risk and Contribution Risk Over Time
Effect of the Required Rate of Return on Investment Strategy
Actuarial Confidence in High Expected Returns
Presenting the Gold Watch
Postscript
CHAPTER 13 The Fully Generalized Pension Budget Identity
The Inviolability of the FEL
CHAPTER 14 Tough Love: Saving the Underfunded Pension Plan
An Action Plan: Something Has to Be Done, but It Isn't Going to Be Easy
Accounting and Reporting Policy
Contribution Policy and Benefit Policy
Investment Policy and Strategy
Making These Changes Is Important!
CHAPTER 15 Public Policy Suggestions-Revising Accounting and Actuarial Standards for Pensions
Only One Accrued Liability, Please!
Articulation between Financial Statements
Pension Expense
Smoothing and Amortizations?
Pension Contributions
Financial Amortization Rather Than Actuarial Amortization
Reconfiguring the Elements of Pension Expense on the Income Statement
Should the Pension Trust Be Off the Sponsor's Balance Sheet, or On?
Financing the PBGC's Guarantee, or Financing Pension Plans Directly?
The IRS and Pension Deductibility
Summary of Public Policy Suggestions
Beyond Managerial Accounting: Should Accounting and Actuarial Regulatory Frameworks Be Changed?
CHAPTER 16 Beyond the Crisis: Making Better Management Decisions and Managing Plans at Lower Risk
Mark-to-Market Accounting Is Not a Reason to Terminate the Plan
The Intuition Is Already Out There
Our Legacy as Pension Advisors
APPENDIX A Variables and Terms Used in the Book
APPENDIX B Implicit Options in the Pension Plan
Termination or Default Option
PBGC Put
Participant Call on Economic Surplus
APPENDIX C Use of Protective Put Options in the Investment Strategy
References
About the Author
Index

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