Changes in Pension Accounting Over Time Have Improved Investor Decision Making and Benefited Other Stakeholders

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Pensions are financial arrangements that allow individuals to receive an income stream during their retirement years (Tatum, 2011). They are found in government institutions, private businesses, professional groups and various other settings. Pensions funds can be found as a part of an institutions or as an independent plan. Pension plans are a major participant in the capital markets. For example, consider the fact that Ontario Teachers’ Pension Plan has a net asset value of $96.4 billion at the end of December 31, 2009. Due to the large stake of pension plans in the local and global economy, there is a persistent pressure to improve pension accounting. These changes have gained momentum with the recent adoption of the International…show more content…
In the DC plan, the final benefits are unknown, but there are fixed contributions whereas in the DC plan, because there is promise of a numerical benefit, the contributions vary as a result of time value of money. This fundamentally means that the risk for the final benefit payout in the DB plan is borne by the employer whereas in the DC plan, the pensioner bears this risk (Beechy & Conrad, 2008). Contributions to a pension fund are an expense for the employer, hence to describe in simple terms, on a per pay basis, an employer will credit the pension fund with amount of pension funds the employee is entitled to. This amount is the present value of the future payment stream payable to the employee upon retirement (Beechy & Conrad, 2008). The present value calculations of these obligations require estimates of factors such as: investment earnings, future salary increases, employee turnover, mortality rates, and life expectancy after retirement (Beechy & Conrad, 2008). Actuarial models are used to generate the probabilities used to calculate the pension obligation today, that will result in the promised payout in the future. While companies do not have to worry about the funding status of DC plans, those that offer the DB plan bear the perpetual burden of ensuring that the plans are funded. There are three basic actuarial methods that can be used by an employer to fund the plan. The first method is the accumulated benefit

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