What Factors Affect the Present Value of Pensions?

According to the provisions of the retirement measures, enterprises should pay a deferred remuneration obligation when employees retire. Represents the liability side of pension accounting. Retirement obligation is a kind of commitment that an enterprise provides to employees during their employment and pays retirement benefits in the future. This obligation is related to the actuarial present value. The so-called actuarial present value refers to the amount that should be paid in the future, taking into account the time factor and the possibility of payment, the value is converted to a specific date.

Pension benefit obligations

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According to the provisions of the retirement measures, enterprises should pay a deferred remuneration obligation when employees retire. Represents the liability side of pension accounting. Retirement obligation is a kind of commitment that an enterprise provides to employees during their employment and pays retirement benefits in the future. This obligation is related to the actuarial present value. The so-called actuarial present value refers to the amount that should be paid in the future, taking into account the time factor and the possibility of payment, the value is converted to a specific date.

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Pension benefit obligations

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Benefits when employees retire

Attributes

A deferred compensation obligation

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Pension Accounting

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American Financial Accounting Standards Board Announcement 87 stipulates three different pension obligations:

(1) The estimated payment obligation is calculated according to the pension payment formula, and the total number of pensions that should be paid in the future up to a specific date is converted into the actuarial present value of that specific date.

(2) The cumulative payment obligation is calculated according to the retirement payment formula, and all the pensions payable in the future up to a specific date are converted into the actuarial present value of that specific date. Cumulative payment obligations are also calculated by actuaries. The calculation method is the same as the estimated payment obligations, except that the cumulative payment obligations are calculated at the current wage level, and the estimated payment obligations are calculated at the future wage level. Generally, future wages are higher than current wages. If the pension benefit formula does not provide for the calculation of pension benefits based on future wage levels, then the cumulative payment obligation is equal to the projected payment obligation; otherwise, the projected payment obligation is greater than the cumulative payment obligation.

The difference between the expected payment obligation and the cumulative payment obligation is induced by the future wage level being higher than the current wage level, which is called the impact of future wage increases. The relationship between the three is as follows:

Expected payment obligations = cumulative payment obligations + impact of future wage increases

The estimated payment obligation lacks reliability because it is necessary to estimate the future wage level, but the future wage level affects the future cash flow, which is the most likely obligation for the enterprise to perform, so it is relevant. Under the assumption of continuing operations, since the number of pension benefits to be paid is calculated based on the salary level before retirement, the estimated payment obligations calculated at the future salary level can more truly reflect the future pension payment obligations of the enterprise.

The purpose of calculating the cumulative payment obligation is that the US Financial Accounting Standards Board does not require that the expected payment obligation be listed on the corporate balance sheet, but the fair value of the minimum retirement fund assets drawn by the enterprise should be equal to the cumulative payment obligation. The difference is called the cumulative payment obligation of the undrawn fund and should be indicated in the financial statements, that is, low pension liabilities.

(3) Vested payment obligation is that the employee's right to receive pension benefits is not subject to continued employment. The enterprise calculates the pension benefits in accordance with the provisions of the retirement measures and converts them into actuarial present value. For employees who have reached the conditions for voluntary retirement on a specific date, if the retirement formalities are processed on that day, the number of retirement benefits to be paid by the enterprise is referred to as the existing benefits. At this time, the vested payment amount is the vested payment obligation; if you do not go through the retirement procedure and continue to stay in the enterprise service, you should convert the vested payment from the expected payment date to the actuarial present value of the specified date, which is the vested payment. Obligation to pay. As the calculation of vested obligations usually requires consideration of time and the possibility of payment, vested obligations on a particular date are less than vested payments. Both the vested payment obligation and the accumulated payment obligation are calculated at the current wage level. The vested payment obligation plus the non-vested payment obligation is the cumulative payment obligation. The vested payment obligation is the payment obligation that the enterprise should bear when the employee leaves midway, and the cumulative payment obligation is the payment obligation that the enterprise may suspend when retiring.