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.

M. BARTON WARING is a financial economist and lawyer, and an active researcher in pension finance and investing. He retired in 2009 from his role as CIO for investment strategy and policy, emeritus, at Barclays Global Investors. Mr. Waring is well known in the pension industry for his many thoughtful and often prizewinning articles. He serves on the editorial board of the Financial Analysts Journal and as an Associate Editor of the Journal of Portfolio Management.

Klappentext

PENSION FINANCE

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 depend on for their retirement needs. This book is a 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.

Inhalt
List of Figures xiii

List of Propositions xv

Foreword xxi

Preface xxv

Acknowledgments xxxiii

CHAPTER 1 Achieving Long Term Health for Pension Plans Using Improved Managerial Accounting Tools 1

Perspectives on DB Plans 2

What Is Economic or Market Value Accounting? 4

What the Following Chapters Provide 5

CHAPTER 2 Today's Conventional Pension Finance Practices 11

Why Managers Need to Adopt the Economic Accounting Perspective 11

Where Are We Today? 12

The Accounting Always Follows the Economics 17

Historical Context: The Actuaries' Contribution to the Existence of Pensions 21

Conclusion 24

CHAPTER 3 Measuring Meaningful Present Values 27

What Is the Right Discount Rate to Use? 27

The Liability-Matching Portfolio: General Perspective 30

Risk-Free Rate vs. Expected Return on Assets 33

If We Can Earn 7.5 Percent Per Year Over The Long Term: Happy and Unhappy Asset Return Distributions 35

The Employer's Experience 44

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! 46

GASB's White Paper and Public Employee Fund Discount Rates 48

Conclusion: Discount Rates 52

Appendix: Are There Market Values for Pension Plans? 53

CHAPTER 4 The Full Economic Liability: The Off-Book Starting Point for Management of Pension Costs 55

The Liability: Inherently an Economic Entity 55

A Newly Formed Pension Plan 58

Multiple Correct Measures of the Accrued Portion of the Liability but Only One PARENT Measure 63

Building a Pension Budget Identity 65

CHAPTER 5 Core Principles of Pension Accounting: The Full Economic Liability Meets Accrual Accounting and Normal Costs 67

Full Economic Normal Cost 68

Enter the Matching Principle: Normal Costs Accruing Over Time 69

Normal Costs and Retirees, Active Employees, and Future Employees 72

Allocating Pension Costs to Current Employees 73

Payment Patterns Other Than Level Payments 82

Illustrating Normal Costs and Accrued and Total Liabilities over Time 86

Comparing Normal Cost Methods 90

Normal Costs and Contributions: Multiple Measures? 92

Normal Cost and Agreed Levels of Benefit Security: An Accrual Method Not Reliant on the Matching Principle 94

Balance Sheet with Accruals of an Economic Measure of Periodic Normal Cost 100

Updating the Beginning-Period Pension Budget Identity 102

Summary of Discussion of Normal Costs 103

Appendix: Computing Level Payment Contributions and Normal Costs with a Handheld Calculator in Order to Gain Understanding of the Nature of the Problem 105

CHAPTER 6 Credit Risk and the Discount Rate 107

Two Useful Views of the Liability's Value 107

Termination and Default Risk 107

Conclusion 114

CHAPTER 7 Paying for the Plan 117

Pension Expense and …