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population growth. The company has been a “mom and draws a pension of $20,000 at the end of each year. How
pop” operation supplemented by part-time workers, so it much must the ¬rm contribute annually (at year-end) over
currently has no corporate retirement plan. However, the the employee™s working life to fully fund the plan by
¬rm™s owner, Andy Johnson, believes that it will be necessary retirement age if the plan™s actuarial rate of return is 10
to start a corporate pension plan to attract the quality percent? Draw a graph that shows the value of the
employees needed to make the expansion succeed. Andy has employee™s pension fund over time. Why is real-world
asked you, a recent business school graduate who has just pension fund management much more complex than indi-
joined the ¬rm, to learn all that you can about pension cated in this illustration?
funds, and then prepare a brie¬ng paper on the subject. To e. Discuss the risks to both the plan sponsor and plan bene-
help you get started, he sketched out the following questions: ¬ciaries under the four types of pension plans.
a. How important are pension funds to the U.S. economy? f. How does the type of pension plan in¬‚uence decisions in
b. De¬ne the following pension fund terms: each of the following areas:
(1) De¬ned bene¬t plan (1) The possibility of age discrimination in hiring?
(2) De¬ned contribution plan (2) The possibility of sex discrimination in hiring?
(3) Pro¬t sharing plan (3) Employee training costs?
(4) Cash balance plan (4) The militancy of unions when a company faces ¬nan-
cial adversity?
(5) Vesting
g. What are the two components of a plan™s funding strat-
(6) Portability
egy? What is the primary goal of a plan™s investment
(7) Fully funded; overfunded; underfunded strategy?
(8) Actuarial rate of return h. How can a corporate ¬nancial manager judge the perfor-
mance of pension plan managers?
(9) Employee Retirement Income Security Act (ERISA)
i. What is meant by “tapping” pension fund assets? Why is
(10) Pension Bene¬t Guarantee Corporation (PBGC)
this action so controversial?
c. What two organizations provide guidelines for reporting
j. What has happened to the cost of retiree health bene¬ts
pension fund activities to stockholders? Describe brie¬‚y
over the last decade? How are retiree health bene¬ts
how pension fund data are reported in a ¬rm™s ¬nancial
reported to shareholders?
statements. (Hint: Consider both de¬ned contribution and
de¬ned bene¬t plans.)




Selected Additional References
For more information on how pension fund man- Regan, Patrick J., “Pension Fund Perspective:
agement has been affected by the Employee Credit Ratings and Pension Costs,” Financial
Retirement Income Security Act of 1974 (ERISA), Analysts Journal, September“October 1983,
including the establishment of the Pension Bene¬t 19“23.
Guarantee Corporation (PBGC), see
For more information on pension plan termina-
Treynor, Jack L., W. Priest, and Patrick J. Regan,
tions, see
The Financial Reality of Pension Funding
Under ERISA (Homewood, IL: Dow Jones- Alderson, Michael J., and K. C. Chen, “The
Irwin, 1976). Consequences of Terminating the Pension
Fund,” Midland Corporate Finance Journal,
The following articles provide additional insights Winter 1987, 55“61.
into the relationship between pension plan Haw, In-Mu, William Ruland, and Ahmed
funding and capital costs: Hamdallah, “Investor Evaluation of Over-
Malley, Susan L., “Unfunded Pension Liabilities funded Pension Plan Terminations,” Journal
and the Cost of Equity Capital,” Financial of Financial Research, Spring 1988, 81“88.
Review, May 1983, 133“145.
29-30 Pension Plan Management
Chapter 29


Other pertinent works include Munnell, Alicia H., “Guaranteeing Private
Pension Benefits: A Potentially Expensive
Bicksler, James L., and Andrew H. Chen, “The
Business,” New England Economic Review,
Integration of Insurance and Taxes in Cor-
March“April 1982, 24“47.
porate Pension Strategy,” Journal of Finance,
July 1985, 943“957. Old¬eld, G. S., “Financial Aspects of the Private
Pension System,” Journal of Money, Credit and
Black, Fischer, “The Tax Consequences of Long-
Banking, February 1977, 48“54.
Run Pension Policy,” Financial Analysts Jour-
nal, July“August 1980, 25“31. Roe, Mark J., “The Modern Corporation and Pri-
vate Pensions: Strong Managers, Weak Own-
Bodie, Zvi, “Pension Funds and Financial
ers,” Journal of Applied Corporate Finance,
Innovation,” Financial Management, Autumn
Summer 1995, 111“119.
1990, 11“22.
Warshawsky, Mark J., “Pension Plans: Funding,
Bodie, Zvi, and Leslie E. Papke, “Pension Fund
Assets, and Regulatory Environment,” Federal
Finance,” Pensions and the Economy, Zvi
Reserve Bulletin, November 1988, 717“730.
Bodie and Alicia H. Munnell, eds. (Philadel-
phia: University of Pennsylvania Press, 1992). Warshawsky, Mark J., H. Fred Mittelstaedt, and
Carrie Cristea, “Recognizing Retiree Health
Bodie, Zvi, and J. Shoren, eds., Financial Aspects
Bene¬ts: The Effect of SFAS 106,” Financial
of the United States Pension System (Chicago:
Management, Summer 1993, 188“199.
University of Chicago Press, 1983).
Bulow, Jeremy I., “What Are Corporate Pension
For an excellent discussion of the relationship
Liabilities?” Quarterly Journal of Economics,
between pension funding policy and the ¬rm™s
August 1982, 435“452.
overall ¬nancial policy, see
Copeland, Thomas E., “An Economic Approach
Bodie, Zvi, Jay O. Light, Randall Morck, and
to Pension Fund Management,” Midland Cor-
Robert A. Taggart, Jr., “Funding and Asset
porate Finance Journal, Spring 1984, 26“39.
Allocation in Corporate Pension Plans: An
Datta, Sudip, Mai E. Iskandar-Datta, and Edward
Empirical Investigation,” National Bureau of
J. Zychowicz, “Managerial Self-Interest, Pen-
Economic Research Working Paper #1315.
sion Financial Slack and Corporate Pension
Funding,” Financial Review, November 1996,
695“720. The Winter 1994 issue of the Journal of Applied
Corporate Finance contains several articles per-
Logue, Dennis E., Managing Corporate Pension
taining to pension plan management.
Plans (New York: HarperCollins, 1991).

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