Pension vs. Postretirement Benefits

Pension vs. Postretirement Benefits There are four fundamental differences between pension and postretirement benefits. (Mcgraw-hill, p967) The amount of pension benefits is based on the number of years an employee works for the company whereas the amount of postretirement healthcare benefits is unrelated to the length of employment. (Mcgraw-hill, p967) The costs of providing coverage can vary significantly dependent on the retiree’s needs for that year. (Mcgraw-hill, p967) Postretirement benefits usually require contributions from the retiree to cover a portion of the expense; pensions are funded by the employer. (Mcgraw-hill, p967) Postretirement benefits are often provided to the retiree’s immediate family, whereas pension is for the retiree only. (Mcgraw-hill, p967)
Types Offered The types of pension and other postretirement benefit plans the company offers to its employees are “defined pension plans, defined contribution plans, and/or other postretirement benefit plans (retirement healthcare and life insurance)” (Caterpillar, 2014, pA-56). Caterpillar’s defined benefit pension plans provide benefits based on years of employment and/or the average earnings near the employee’s retirement. (Caterpillar, 2014, pA-56) Caterpillar’s defined contribution plans allow employees to contribute part of their income to help save for retirement; and Caterpillar provides a matching contribution in some situations. (Caterpillar, 2014, pA-56)
Reporting Pension Plans The reporting requirements for pension plans in the financial statements is that the annual accounting expense or income (net periodic pension cost) be recognized in the income statement and direct adjustments to the balance sheet of the plan sponsor, if applicable. (Pension Committee of the American Academy of Actuaries, 2004, p9-10) The net periodic pension cost is calculated using the projected benefit obligation, the accumulated benefit obligation, the service cost, and the market related value