Pension finance
Subtitle: putting the risks and costs of defined benefit plans back under your control
By: M. Barton Waring
Edition: 1
Series: Wiley finance series -- 708
Publisher: Wiley; John Wiley [distributor]
Published: 2011
Place of publication: Hoboken, NJ
Language: eng
Number of pages: 344
ISBN-13: 9781118106365; 9781118106372
Subjects: Finance; Management; Pension trusts; Pensions management; Pensions
Description: "Defined benefit pension plans are in a severe crisis. With nearly a $4 trillion deficit in the U.S. alone, Canada, the UK, Japan, and Holland also suffer from unfunded liabilities. In short, the pension crisis is nearly global in proportion, and there is little likelihood that plan sponsors will be able to come up with the funds to repair the damage. One of the major problems behind the crisis is the approach: pension plans use actuarial science as the basis of assumptions but are subject to the laws of economic finance in terms of their returns. In short, there is a gap between the world presumed by actuaries who determine funding levels and the world as it come to be as determined by market performance and investment outcomes. Waring tackles this thorny issue head on. Well versed in both economic and actuarial science, he walks professionals through the differences and shows why plan sponsors need to focus on the economic account perspective to meaningfully measure present values. Complete coverage of credit risk and the discount rate to determine liability values is examined, contribution levels are then presented based on this revised approach to actuarial accounting. Pension plan sponsors and their employee representatives must face the economics - and adjust their accounting and actuarial view - to gain a true perspective on achieving sustainable benefit levels. Waring is one of the first investment professionals to tackle this controversial topic head on to present realistic solutions to potentially catastrophic problems looming in the very near term"--
Notes: Includes bibliographical references and index.
Table of contents: title: Machine generated contents note: Foreword.Preface.List of Propositions.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% Per Year Over The Long Term": Happy and Unhappy 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.Normal Costs: 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 Normal Costs with a Hand-Held 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.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: Analyzing Contributions for the Aggregate Plan with an HP 12c.Conclusion.Chapter 8 Investment Strategy I: Surplus Optimization.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 = 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 ReturnsPresenting 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 option.PBGC put.Participant call on economic surplus.Appendix C Use of Protective Put Options in the Investment Strategy.References.About the Author.Index.