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Posted by Paul Thomas, CPA on March 6, 2006, 7:35 am
>I know exactly what a pension and a defined-benefits plan works.
> However, here are my many novel questions regarding the accounting and
> other salient features of the pension plans:
>
> 1. Pensions, to me at least, is just another form of compensation. On
> the income statement, this should be included as SG&A, since it's a
> portion of wages. However, this isn't the case. It is accounted for in
> the balance sheet as a liability.
For a defined benefit plan, yes, as well as for the unpaid portion of a
defined contribution plan (generally the December payment made in January
(etc).
But, to create the liability, you either have to create an asset, or an
expense. So, unless the 'double entry' thing is all a myth, something had
to hit the income statement.
> 2. Are pensions funded in "real-time"? Another words, a worker's
> wages are paid in real-time, in the sense that if the employer didn't
> pay the worker's wage, there would be HUGE strikes, and so on. So I
> would think that the pension is paid the exact same way: Each pay
> cycle, the employer puts a small amount of money on behalf othe
> employee in some other account, which will ideally grow at some rate.
> Typically, the investments that the pension is placed in is a pooled
> investment of stocks and maybe bonds.
Under a defined contribution plan, it works just like that. The amount to
contribute is a function of the wages earned during that period, and that
amount gets deposited into the plan which invests the money. Each
participating employee has a pot full of the pool of money and it is
accounted for by employee.
Under a defined benefit plan, an actuary (a real gem at a party) determines
the amount that will be needed down the road to pay out to the retired
workers. The actuary determines the current portion of the future outlay
and they book that amount. In a good economy (like in the late 90's when a
$100 investment would be $200 by Friday) the current amount needed to invest
to have the funds to pay out in 20+ years was small (or in some cases a
negative amount). If investments grew better than expected, the retirees
didn't get any more at retirement, the company just had to contribute less.
Since it's not necessarily a funded plan (most aren't) the company may, at
the discretion of the Board, set some amount aside on the balance sheet into
a "pension fund account" that is still a company asset, and a corresponding
liability is created. No actual money ever goes to a plan (at least not
enough to cover the obligation).
> 3. How is it possible that GM and some other companies have "unfunded
> pension liabilities" (UPL)? Doesn't this amount to stealing, since
> they employer apparently spent the earnings of the employees? While GM
> was paying their workers, didn't they not "lock up" a portion of this
> wage into the worker's pension account? Please explain.
Those plans were (and still are) around, and no, it's not the employees
money, nor is it the pension funds money. Not in a defined benefit plan.
Congress allowed those types of plans many years ago. There are no employee
finds involved (as there may be under a defined contribution plan).
The problems you hear on the news are all with defined benefit plans.
Defined contribution plans are all funded plans and the money is there to
earn interest and dividends, and to reap the gains or losses of the
marketplace.
--
Paul Thomas, CPA
paulthomascpapc@bellsouth.net
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