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Article
Publication date: 1 August 1997

Edward J. Zychowicz

This paper examines the formation of pension plans from a corporate finance perspective. The theoretical underpinnings for selecting a defined‐benefit or defined

Abstract

This paper examines the formation of pension plans from a corporate finance perspective. The theoretical underpinnings for selecting a defined‐benefit or definedcontribution plan are discussed and used to form empirically testable hypotheses. Linear probability and logit models are used to identify corporate financial characteristics that affect the likelihood of forming a defined‐benefit or definedcontribution plan. The results strongly indicate that firms with high degrees of debt and intangible assets are least likely to form defined‐benefit plans in a post‐reversion situation, while firm size enhances the probability of forming defined‐benefit plans. The growth in private retirement plans over the past quarter century has made pension fund management a critical concern for many financial managers. The total amount of assets in private pension plans amounted to approximately $150 billion in 1970, while this figure was about $2 trillion in 1989. A corresponding trend to this growth has been an acceleration in the formation of definedcontribution plans relative to defined‐benefit plans. In 1975 about 29 percent of all plans were definedcontribution plans, and 71 percent were defined‐benefit plans. In contrast, definedcontribution plans comprised 55 percent of all plans in 1988, while 45 percent were defined‐benefit plans.1 Gustman and Steinmeier (1987) suggest that the shift to definedcontribution plans in recent years may be attributable to shifts in jobs in the economy away from the manufacturing sector and toward the service sector. Furthermore, the role of unions, firm size, and administrative costs have also been sighted as factors which partially explain the economy wide shift toward definedcontribution plans (see Gustman and Steinmeier (1989), Clark and McDermed (1990), and Kruse (1991)). In this paper, we address the pension choice by examining the formation of individual plans from a corporate finance perspective. Specifically, we examine the pension choice issue when firms are faced with making this decision after the termination of an overfunded defined‐benefit plan. The remainder of this paper is organized as follows. Section I discusses the possible motives for selecting one plan over the other, and develops testable hypotheses. The data and methodology are discussed in section II, while section III presents the empirical results. Section IV summarizes and concludes the paper.

Details

Managerial Finance, vol. 23 no. 8
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 17 August 2015

Shafiqur Rahman

This paper aims to compare and contrast alternative pension plans in the market place and their status as zakatable wealth or property. These plans differ in terms of who…

Abstract

Purpose

This paper aims to compare and contrast alternative pension plans in the market place and their status as zakatable wealth or property. These plans differ in terms of who is responsible for providing funds for pension benefit to the retirees upon retirement and who is responsible for bearing investment risk. Whether a pension plan is subject to zakat immediately or upon receipt at retirement depends on immediate accessibility to and ownership of the funds in the account. It makes no difference whether employer and/or the employee is (are) responsible for funding the plan and who bears the investment risk.

Design/methodology/approach

Descriptive and analytical methods were used.

Findings

There is consensus among Muslim jurists and shariah scholars that mandatory retirement plans offered as a part of compensation and benefit package for a job are subject to zakat when money is received upon retirement and non-mandatory plans offered as replacement for or supplement to employer-sponsored plans with voluntary employee participation are subject to zakat in each year of employment.

Originality/value

There is no prior research work in the extant literature examining zakatability of alternative retirement plans offered in the US marketplace. This paper fills this void and provides a comprehensive survey and analysis of all available retirement plans and their treatment with respect to zakat.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 8 no. 3
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 30 September 2008

Sharad Asthana

The purpose of this paper is to examine the determinants of US firms' postretirement benefits choices.

Abstract

Purpose

The purpose of this paper is to examine the determinants of US firms' postretirement benefits choices.

Design/methodology/approach

The paper uses empirical methodology (univariate and multivariate) to test the research hypotheses.

Findings

Industry norm, average employee age, financial structure, and firm size are significant factors in the determination of the proportion of compensation that is deferred. Industry norm, financial structure, and firm size are significant factors that determine the percentage of deferred compensation that is negotiated as defined benefits. Finally, industry norm, corporate tax rates, and cash flow help explain the percentage of defined benefits that are paid in the form of retiree health benefit plans.

Research limitations/implications

Data requirements might bias the sample towards larger sized firms. Data availability limits the number of observations in 2000 and 2001.

Practical implications

The trends in post‐retirement benefits reported in this paper are important for policy makers.

Originality/value

These findings have implications for the baby boomers. The trend to offer smaller proportion of compensation as deferred benefits reflects the increasing costs of deferral to the employers. This increases the employees' responsibilities to save on their own. This also would shift the retirees' dependence on the public pension system for their retirement income. The trend to favor definedcontribution plans instead of defined‐benefit plans reflects the employers' attempts to diversify their risks of paying promised post‐retirement benefits by transferring the risk to the employee. On the other hand, the popularity of definedcontribution pension plans also reflects the increased Government's incentives to encourage savings via 401‐k plans and employee's willingness to manage their own pension portfolios.

Details

Accounting Research Journal, vol. 21 no. 2
Type: Research Article
ISSN: 1030-9616

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Article
Publication date: 21 April 2010

Alistair Byrne, David Blake and Graham Mannion

We examine the contribution and investment decisions made by members of a large UK‐based DC pension plan. We find that many employees appear to be relatively financially…

Abstract

We examine the contribution and investment decisions made by members of a large UK‐based DC pension plan. We find that many employees appear to be relatively financially sophisticated and follow approaches consistent with economic and financial theory in terms of savings rates and investment strategies. However, there are also many less sophisticated employees who stick with plan default arrangements and/or follow simple rules of thumb in saving and investing. The challenge for corporate sponsors of pension plans is in designing arrangements and communication strategies that reduce the chances of these less sophisticated plan members making mistakes – in the sense of systematic deviations from optimal behaviour.

Details

Review of Behavioural Finance, vol. 2 no. 1
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 1 April 2006

Francesco Menoncin and Olivier Scaillet

The purpose of this paper is to study the asset allocation problem for a pension fund which maximizes the expected present value of its wealth augmented by the prospective…

Abstract

Purpose

The purpose of this paper is to study the asset allocation problem for a pension fund which maximizes the expected present value of its wealth augmented by the prospective mathematical reserve at the death time of a representative member.

Design/methodology/approach

The paper applies the stochastic optimization technique in continuous time. In order to present an explicit solution it considers the case of both deterministic interest rate and market price of risk.

Findings

The paper demonstrates that the optimal portfolio is always less risky than the Merton's (1969‐1971) one. In particular, the asset allocation is less and less risky until the pension date while, after retirement of the fund's representative member, it becomes riskier and riskier.

Practical implications

The paper shows the best way for managing a pension fund portfolio during both the accumulation and the decumulation phases.

Originality/value

The paper fills a gap in the optimal portfolio literature about the joint analysis of both the actuarial and the financial framework. In particular, it shows that the actuarial part strongly affects the behaviour of the optimal asset allocation.

Details

Managerial Finance, vol. 32 no. 4
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 25 July 2008

Robert Watson

The purpose of this paper is to evaluate the relative risks and benefits associated with defined contribution (DC) and defined benefit (DB) pension schemes. New regulatory…

Abstract

Purpose

The purpose of this paper is to evaluate the relative risks and benefits associated with defined contribution (DC) and defined benefit (DB) pension schemes. New regulatory and governance requirements and demographic changes have all significantly raised the costs and reduced the expected benefits to employers of operating DB schemes. In response, many employers have either closed down their DB schemes, closed the scheme to new members and/or to capped any further accruing of benefits for existing members. This decline in DB schemes and their replacement by less generous DC schemes, has been overwhelmingly seen by employees, the general public and Government as an unwelcome development that shifts significant pension risks from the employer onto the employee.

Design/methodology/approach

The paper evaluates claims that DB schemes are less risky than DC schemes and, whether their passing ought to be such a cause of concern.

Findings

The paper finds that DC schemes are not inherently riskier than DB schemes. Indeed, it is argued that the low operational, governance and regulatory costs and flexibility of DC schemes provide employers and employees with the most cost‐effective means of saving for a pension. In contrast, despite the appearance that the employer rather than the employee is the primary risk bearer in respect of DB schemes, it is shown that this is largely a fallacy. Such an arrangement merely substitutes an employer's covenant for some portion of an independent (of the employer) investment portfolio. This reliance upon an employer's promises to continue to support and fund the pension scheme imposes a raft of additional firm‐specific (i.e. non‐diversifiable) risks and regulatory and governance costs upon the members of both DB and DC schemes.

Originality/value

The paper provides a topical and useful review of the risks, costs and benefits of DC and DB pension schemes in the UK.

Details

Journal of Financial Regulation and Compliance, vol. 16 no. 3
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 22 February 2021

Ishay Wolf and Jose Maria Caridad y Ocerin

This paper aims to analytically show that in an over-lapping-generation (OLG) model, low earning cohorts bear unwanted risk and absorb higher economic cost than high…

Abstract

Purpose

This paper aims to analytically show that in an over-lapping-generation (OLG) model, low earning cohorts bear unwanted risk and absorb higher economic cost than high earning cohorts do.

Design/methodology/approach

This paper aims to consider the individual's risk appetite, using a simple utility function, based on consumptions and discount rates in each period. This paper calibrates the model according to teh Israeli pension system as a representative of a small open developed organization for economic cooperation and development country. Israel is considered as unique case study in the pension landscape, as it implements almost pure defined contribution pension scheme with continuous trend of pension market capitalization (Giorno and Jacques, 2016). Hence, this study finds Israel suitable for examining the theoretical mix of pension scheme. That model enables exploring combined solutions for adequate old age benefits, involving the first and the second pension pillars, under fiscal constraints.

Findings

It comes out that for risk-averse individuals, the optimal degree of funding is negatively correlated to asset returns' volatility and positively correlated to earning decile level. The neglect of risk and individual's current earning level will thus overstate the contribution level and funded percentage from total contributions. Moreover, even in an economy with minimum government intervention, and highly developed private pension fund with high average of rate of return, the authors find it is optimal that the pension system contains a sizeable unfunded pillar. This paper innovates by revealing a socio-economic anomaly in design of mix pension systems in favor of high earning cohorts on the expense of economic loss of low earning cohorts.

Practical implications

The model presented in this paper could be implemented in countries with mix pension systems, as an alternative to public social transfers or means tested, alleviating poverty and inequality in old age. Additionally, this model could raise the public awareness of the financial sustainability of the unfunded pay-as-you-go pillar to diversify financial risk in pension systems, especially for low earning cohort in society.

Social implications

One area of research that is particularly relevant in this context concerns the issue of alleviating poverty and income inequality. It is often stressed that the prevention of old age poverty is among the central targets of well-designed pension system (Holzmann and Hinz, 2005). The conceptualization of minimum pension guarantee used in this composition allows to clearly capturing the notion of such a poverty and social targets as an integral part of the pension system rolls.

Originality/value

This paper innovates by revealing a socio-economic anomaly in design of mix pension systems in favor of high earning cohorts on the expense of economic loss of low earning cohorts. That comes to realize through the level of total contribution rates and funded share that are generally optimal for high earning cohorts but not for low earning cohorts. This paper identifies that the effect of anomaly is most significant in a market characterized with high income-inequality level. This paper finds that imposing intra-generational risk sharing instrument in the form of minimum pension guarantee can re-balance pension design among different earning cohorts. This solution demonstrates balancing effect on the entire economy.

Details

Journal of Financial Economic Policy, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 25 July 2008

Alistair Byrne, Debbie Harrison and David Blake

The purpose of this paper is to provide an overview of key issues in the governance of defined contribution pension schemes, with a focus on investment matters, and to…

Abstract

Purpose

The purpose of this paper is to provide an overview of key issues in the governance of defined contribution pension schemes, with a focus on investment matters, and to recommend best practices.

Design/methodology/approach

The paper draws on the results of an online survey of the opinions of pensions professionals and on interviews with pensions professionals.

Findings

The paper finds that many employers and pension scheme trustees are reluctant to take an active role in pension scheme design and to provide support and guidance to members for fear of legal liability. Scope exists for regulators and legislators to create “safe harbour” provisions that will encourage employers and trustees to become more active in supporting members.

Practical implications

The paper makes a number of suggestions for best practice in the design and governance of defined contribution pension schemes, for example, in terms of the fund choice that should be offered.

Originality/value

The paper provides the first comprehensive review of investment issues for UK defined contribution pension plans.

Details

Journal of Financial Regulation and Compliance, vol. 16 no. 3
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 10 September 2020

Su-Jane Hsieh, Yuli Su and Chun-Chia Amy Chang

Managers of defined-benefit (DB) firms have considerable discretion in deriving pension costs and flexibility in cash contributions to pension plans. Pension accruals…

Abstract

Purpose

Managers of defined-benefit (DB) firms have considerable discretion in deriving pension costs and flexibility in cash contributions to pension plans. Pension accruals occur when cash contributions differ from pension costs. The manipulable nature of pension costs and cash contributions allows managers of DB firms to manipulate pension accruals to achieve their desired earnings. We study whether DB firms with earnings management attributes (referred to as suspect DB firms) used more discretionary pension accruals (DPA) than non-suspect DB firms, especially after the passage of Sarbanes-Oxley (SOX).

Design/methodology/approach

The authors develop an aggregate measure of DPA to capture overall earnings management in pension accounting. They then employ a multivariate regression model to study whether the suspect DB firms engage in more DPA than non-suspect firms and to assess the impact of SOX on DPA for all DB firms and for suspect DB firms.

Findings

The authors find evidence that suspect firms inflate DPA to achieve their earnings goals and also that all DB firms and the suspect firms use more DPA in the post-SOX era compared to the pre-SOX period. In contrast, they observe no significant difference in real activities earnings management (REM) between suspect and non-suspect firms. In addition, neither the entire sample of DB firms nor the suspect firms display a significant change in REM after SOX.

Research limitations/implications

The samples in the study are limited to firms with defined pension plans; thus, the findings cannot be generalized to all firms. In addition, as in other empirical studies relying on models to estimate earnings management proxies, this study inherits estimation errors from Jones and Roychowdhury's models. Consequently, the impact of these estimation errors cannot be ruled out.

Practical implications

The empirical findings of the study appear that instead of deterring DB firms from engaging in pension accruals earnings management, enacting the stringent anti-fraud SOX prompts these firms to rely more on accrual-based discretionary pension rather than switch to real activities manipulation to manage earnings.

Originality/value

While many prior studies focus on the impact of managing individual pension assumptions on earnings, the authors study overall earnings management in pension accounting by developing a model to derive an aggregate measure of pension earnings management.

Details

Journal of Applied Accounting Research, vol. 22 no. 1
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 1 May 2001

Paul Klumpes

Examines the financial accountability implications arising from the adoption of accrual‐based accounting principles by Australia’s largest public sector employee pension

Abstract

Examines the financial accountability implications arising from the adoption of accrual‐based accounting principles by Australia’s largest public sector employee pension fund manager, the State Authorities Superannuation Board of the Australian State of New South Wales (SASB), during its brief existence from 1988 to 1996. While the adoption of accrual‐based accounting principles increased management’s political accountability concerning the performance of SASB’s commercially‐managed asset portfolio, it reduced the level of generational accountability concerning the under‐funding of its major pension fund, the State Authorities Superannuation Scheme (the SAS). Negative political visibility associated with management’s voluntary compliance with a controversial financial reporting standard, together with government’s adoption of accrual accounting, resulted in two major changes in the SASB’s organizational structure. The impact of political visibility on the generational accountability behavior of SASB management is examined by comparing stock and flow funding trends of the SAS over time.

Details

Accounting, Auditing & Accountability Journal, vol. 14 no. 2
Type: Research Article
ISSN: 0951-3574

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