Quiz 18: Cost and Funding Considerations

Business

Pension plan Pension plans are part of post retirement benefits paid to the employees. They can be defined contribution plan or defined benefit plan. Under defined contribution plan, employer makes fix percentage of contribution in the plan and similar contribution is made by the employee. Employer's liability is limited to the contribution to be made. Under defined benefit plan, employer contributes to the plan as per the age and service period of the employee. In this case of there is any shortfall for payment to the employee for the services provided the employer will have to make further contribution to the plan. There is no fix contribution as in defined contribution plan. In order to set assumptions under defined benefit plan the procedure followed would be first to the characteristics of employee group plan. The costs involved in pension plan should be determined. The amount which company need to pay at retirement of employees should be determined as part of procedure. Company should study the past data and undertake trend analysis to determine the assumptions to be set.

Pension plan refers to retirement plan established by employer to provide a constant income to employees after retirement so that they could continue with their present standard of living even after permanently withdrawal from workforce. Eligible employees are allowed to participate in such pension plans where the benefit to be made available to employees depends upon various factors. The cost on such benefit plan served as the most important factor and after determining of all the related actual costs, the benefit is made available to the participants. This benefit basically depends upon the number of employees that are entitled to receive the benefit. In order to determine this number of employees, it is necessary to consider four basic factors. This are- 1.  Mortality rate Higher the mortality, lower is the cost of benefits under such plans. Plans that are designed to provide no or very reduced benefit after retirements tends to be less costly if the mortality rate is higher among the active employee. In case of pre retirement death benefit, however this cost may be increased. 2.  Rate and duration of disability This factor is necessarily important in case of disability benefit active in a plan. This benefit obviously increases the cost of the plan benefit. This cost can be estimated either by determining the frequency of occurrence of such disability that calls for benefits and the duration of such disability. 3.  Layoff and termination of employment The cost is reduced for a pension plan in case of voluntary quit or termination of employment. The rate of such termination or layoff must be determined to estimate the cost reduction that might benefit the pension plan and also the number of employees to be eligible for benefit. 4.  Rate of retirement Another factor includes determining of various ages at which individual's retire. The higher is the retirement age the lower is the cost of benefits associated with the plan. Many individuals opt for early retirement however some defer the same even after the retirement age. These are the factors that should be evaluated in determining the number of employees eligible for retirement benefits under a pension plan.

Pension plan Pension plans are part of post retirement benefits paid to the employees. They can be defined contribution plan or defined benefit plan. Under defined contribution plan, employer makes fix percentage of contribution in the plan and similar contribution is made by the employee. Employer's liability is limited to the contribution to be made. Under defined benefit plan, employer contributes to the plan as per the age and service period of the employee. In this case of there is any shortfall for payment to the employee for the services provided the employer will have to make further contribution to the plan. There is no fix contribution as in defined contribution plan. The assumptions in question 1 should be updated six-monthly as most of the assumptions are based on interest rate which is subject to change based on market volatility. In order to determine accurate calculation and payment the assumptions should be updated more frequently.

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