Pensions

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Pensions

Pension Plan Characteristics

Contributory Plan

Employer and employee contribute

Employees keep their contributions

Vesting requirement determines employee right to employer contributions -- incentive to stay long time (typically 5 years or longer)

Defined Contribution Plan

Specific contributions are promised by the employer

Specific benefits are NOT PROMISED

Benefits are a function of the management of the plan assets

Pension expense = contributions made by employer

(db)Pension Expense XX,XXX

(cr)Cash XX,XXX

Defined Benefit Plan

Specific benefit payments are promised by the employer

More complex accounting than contributory plans

Funded Pension Plan

Fully funded: Plan Assets (amount accum thus far) = PV of Projected benefit obligations (based on projected salary)

Partially funded: Plan Assets

Net Pension Benefit = Pension Expense

Composed of service cost (based on payroll in current period), interest cost on PBO, plan asset (reduces pension expense) return, prior service costs amortization (amortize over useful life of employees it applies to),