Question

Please discuss and answer the two questions listed below in detail.

1. What are the different types of pension plans? How are they different and how do they impact the employer and the employee? What type of plan do most companies have?

2. Discuss the amortization of Accumulated OCI (Gain/Loss). How do you amortize the accumulated Gain/Loss (illustrate with examples)?

Answer 1

Answer to question no. 1

We can have the following types of pension plans

1. Defined contribution plans

2. Defined benefit plans

3. Hybrid and cash balance plans.

Under defined contribution plan the contribution made by the employer is fixed. Here the employer makes a fixed amount of contribution each month to the pension fund w.r.t. each individual employee. These funds are invested and the profit/loss out of such investment is credited to the account of the pension fund w.r.t. each individual employee. Hence here the employee bears the risk of gain/loss on sale of investments and the contribution of the employer remains fixed! The employer's liability is limited to the amount of contribution being made.

Under defined benefit plan, the benefit/pension that will be paid out to an employee is fixed. This amount of pension which will be paid out to an employee is calculated on the basis of employee salary, no of completed years of service and a factor (accrual rate). In case of these funds individual accounts are not maintained and the funds may be invested as a whole, since the entire risk of gain/loss on investments is borne by the employer and the employee is entitled to a defined pension benefit on retirement.

Hybrid and cash balance plan is a mix of above mentioned two plans and combines the fetures of both.

Most companies have 'Defined contribution plan'. The usage of Defined benefit plans is on a steady decline and is disappearing fast.

Answer to question no. 2

Accumulated OCI is the amount of gain/loss which has not been recongnised in the income statement for the ascertainment of profit/loss. Amortization of Accumulated OCI happens in subsequent years and a certain amount is recogised as an expense each year. ASC 715-30-35-24 determines the minimum amount of such gains and losses that must be recognized each year.