2. Situation analysis
3. Valuation of plan’s Liabilities and Assets
One can see the US pension system as having 3 major stakeholders: the company, which provides the pension plan, the current employees, who benefit from the plan once they retire, and the retirees, who have an interest to keep their pension unreduced. The three stakeholders differ in their objectives. Although not required by law, many US companies provide pension plans. This is done in large part to attract and retain personnel. The companies are concerned with offering attractive retirement packages, but at the same time they need to care for the long-term financial health of the company. Therefore companies will try to find ways to minimize their costs arising from pension plans. Current employees are the future benefactors of company’s pension plan. Naturally, their main objective is to maximize the future pension benefits. However, employees must also care about the financial well-being of the company, since their future pension depends on it. Lastly, the pensioners are obviously most concerned that their pension isn’t reduced due to, for example, financial distress at the company.
There are two main types of pension plans: the Defined Benefit (DB) and Defined Contribution (DC) plans. In a DB plan, the company commits itself to making fixed monthly payments to its retirees until they die. These plans can be operated as funded or on pay-as-you-go basis. In a funded plan, the pension plan channels money to an investment trust which is then invests the money to assets of appropriate risk/return profile. In a plan operated under pay-as-you-go basis companies simply pay the pension benefits from the funds it has available. In contrast, in a DC plan the plan sponsor does not guarantee the future benefits of the pension, but rather the contribution it...