AFM391 Chapter Notes - Chapter 19: Corporate Bond, Defined Contribution Plan, Pension
8 Dec 2017
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Types of plans: contributory plans: employees pay part of cost of stated benefits/voluntarily make payments to increase benefits, non-contributory plans: employer bears entire cost. Tax treatment: deductions of employer and employee contributions allowed; benefits are only taxable when received by pensioner. Size of pension benefit depends on factors: amounts contributed to pension trust, treatment of forfeitures of funds created by termination of employees before. Defined benefit plan: post-employment benefit plan other than defined contribution plan; employee"s benefits are defined employer contributions are not fixed: vesting: employee keeps right to benefit even if employee no longer works for company. With defined benefit plan, employer assumes economic risks: employee is secure because the benefits paid out are predefined, but employer risk is uncertain. Methods of measuring pension obligation valuation: 1. Vested benefit method: based on current salary levels. Projected unit credit method: based on current salary levels. Includes both vested and non-vested service: 3. Projected benefit method: based on future salary levels.
