{"product_id":"pension-finance-isbn-9781118106365","title":"Pension Finance","description":"Pension plans around the world are in a state of crisis. U.S. plans alone are facing a total accrued liability funding deficit of almost $4 trillion (of the same order of magnitude as the federal debt), a potential financial catastrophe that ranks among the largest ever seen. It has become clear that many government, corporate, and multi-employer pension sponsors will not be able to cope with this crippling debt and may default on promised benefits. And many of those sponsors that might be able to cope are exasperated by continuous, ongoing negative surprises-large unexpected deficits and higher-than-expected required contributions and pension expense-and are choosing to terminate their plans. \u003cp\u003eBut it need not be so. \u003ci\u003ePension Finance: Putting the Risks and Costs of Defined Benefit Plans Back under Your Control\u003c\/i\u003e walks the reader through the conventional actuarial and accounting approaches to financing pension benefits and investing plan assets, showing that the problems described happen as a natural consequence of the dated methods still in use. It shows in detail how modern methods based on market value will easily minimize these risks: Pension plans can in fact be comfortable for employers to sponsor and safe for employees to contribute todepend on for their retirement needs.\u003c\/p\u003e \u003cp\u003eThis book is must-read for defined benefit pension plan sponsors and employee representatives, plan executives, board members, accountants, fund managers, consultants, and regulators., Research sponsored by the CFA Institute, this book demystifies pension finance, previously accessible only to actuaries. It teaches the topic in lay terms by drawing complete analogies to ordinary transactions such as paying off a mortgage or saving for college. Armed with this book, anyone comfortable with finance and investments in any other context can be comfortable with pension finance and pension investment policy. And further armed with a handheld financial calculator, any layperson can quickly estimate the contributions needed to keep a given plan comfortably solvent, giving them a powerful tool for oversight.\u003c\/p\u003e  List of Figures xiii  \u003cp\u003eList of Propositions xv\u003c\/p\u003e \u003cp\u003eForeword xxi\u003c\/p\u003e \u003cp\u003ePreface xxv\u003c\/p\u003e \u003cp\u003eAcknowledgments xxxiii\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 1 Achieving Long Term Health for Pension Plans Using Improved Managerial Accounting Tools 1\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003ePerspectives on DB Plans 2\u003c\/p\u003e \u003cp\u003eWhat Is Economic or Market Value Accounting? 4\u003c\/p\u003e \u003cp\u003eWhat the Following Chapters Provide 5\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 2 Today’s Conventional Pension Finance Practices 11\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eWhy Managers Need to Adopt the Economic Accounting Perspective 11\u003c\/p\u003e \u003cp\u003eWhere Are We Today? 12\u003c\/p\u003e \u003cp\u003eThe Accounting Always Follows the Economics 17\u003c\/p\u003e \u003cp\u003eHistorical Context: The Actuaries’ Contribution to the Existence of Pensions 21\u003c\/p\u003e \u003cp\u003eConclusion 24\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 3 Measuring Meaningful Present Values 27\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eWhat Is the Right Discount Rate to Use? 27\u003c\/p\u003e \u003cp\u003eThe Liability-Matching Portfolio: General Perspective 30\u003c\/p\u003e \u003cp\u003eRisk-Free Rate vs. Expected Return on Assets 33\u003c\/p\u003e \u003cp\u003e“If We Can Earn 7.5 Percent Per Year Over The Long Term”: Happy and Unhappy Asset Return Distributions 35\u003c\/p\u003e \u003cp\u003eThe Employer’s Experience 44\u003c\/p\u003e \u003cp\u003eThe Discount Rate Is in Fact the Same on Both Sides of the Full Economic Balance Sheet, But That Doesn’t Mean That the Liability Changes Its Value with Changes in Investment Strategy! 46\u003c\/p\u003e \u003cp\u003eGASB’s White Paper and Public Employee Fund Discount Rates 48\u003c\/p\u003e \u003cp\u003eConclusion: Discount Rates 52\u003c\/p\u003e \u003cp\u003eAppendix: Are There Market Values for Pension Plans? 53\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 4 The Full Economic Liability: The Off-Book Starting Point for Management of Pension Costs 55\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eThe Liability: Inherently an Economic Entity 55\u003c\/p\u003e \u003cp\u003eA Newly Formed Pension Plan 58\u003c\/p\u003e \u003cp\u003eMultiple Correct Measures of the Accrued Portion of the Liability but Only One \u003ci\u003ePARENT\u003c\/i\u003e Measure 63\u003c\/p\u003e \u003cp\u003eBuilding a Pension Budget Identity 65\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 5 Core Principles of Pension Accounting: The Full Economic Liability Meets Accrual Accounting and Normal Costs 67\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eFull Economic Normal Cost 68\u003c\/p\u003e \u003cp\u003eEnter the Matching Principle: Normal Costs Accruing Over Time 69\u003c\/p\u003e \u003cp\u003eNormal Costs and Retirees, Active Employees, and Future Employees 72\u003c\/p\u003e \u003cp\u003eAllocating Pension Costs to Current Employees 73\u003c\/p\u003e \u003cp\u003ePayment Patterns Other Than Level Payments 82\u003c\/p\u003e \u003cp\u003eIllustrating Normal Costs and Accrued and Total Liabilities over Time 86\u003c\/p\u003e \u003cp\u003eComparing Normal Cost Methods 90\u003c\/p\u003e \u003cp\u003eNormal Costs and Contributions: Multiple Measures? 92\u003c\/p\u003e \u003cp\u003eNormal Cost and Agreed Levels of Benefit Security: An Accrual Method Not Reliant on the Matching Principle 94\u003c\/p\u003e \u003cp\u003eBalance Sheet with Accruals of an Economic Measure of Periodic Normal Cost 100\u003c\/p\u003e \u003cp\u003eUpdating the Beginning-Period Pension Budget Identity 102\u003c\/p\u003e \u003cp\u003eSummary of Discussion of Normal Costs 103\u003c\/p\u003e \u003cp\u003eAppendix: Computing Level Payment Contributions and Normal Costs with a Handheld Calculator in Order to Gain Understanding of the Nature of the Problem 105\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 6 Credit Risk and the Discount Rate 107\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eTwo Useful Views of the Liability’s Value 107\u003c\/p\u003e \u003cp\u003eTermination and Default Risk 107\u003c\/p\u003e \u003cp\u003eConclusion 114\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 7 Paying for the Plan 117\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003ePension Expense and Contributions 117\u003c\/p\u003e \u003cp\u003eOther Components of Pension Expense in Addition to Normal Cost 117\u003c\/p\u003e \u003cp\u003eDistinguishing Economic from Conventional Supplemental Costs 119\u003c\/p\u003e \u003cp\u003eStrict Economic Pension Expense 120\u003c\/p\u003e \u003cp\u003eEconomic Pension Expense in an Accrual System 122\u003c\/p\u003e \u003cp\u003eContributions to the Asset Pool, and the Sponsor’s Credit Risk 123\u003c\/p\u003e \u003cp\u003eInvestment Returns on Contributed Assets 124\u003c\/p\u003e \u003cp\u003eBenefit Payments 125\u003c\/p\u003e \u003cp\u003eThe Components of Economically Determined Contributions 126\u003c\/p\u003e \u003cp\u003eAn Example Immediately Usable in the Boardroom: Analyzing Contributions for the Aggregate Plan with an HP 12c 129\u003c\/p\u003e \u003cp\u003eThe Volatility Of The Deficit Is Equal To The Volatility of Contributions 133\u003c\/p\u003e \u003cp\u003eConclusion 134\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 8 Investment Strategy I: Liability-Relative Optimization 135\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eInvestment Policy and Strategy for Investors with Liabilities 135\u003c\/p\u003e \u003cp\u003eThe Augmented Balance Sheet: Optimizing on the Combined Risks of the Sponsor and the Plan 139\u003c\/p\u003e \u003cp\u003eBrief Review of the Theory of Surplus Return and Surplus Asset Allocation 140\u003c\/p\u003e \u003cp\u003eThe Elephant in the Strategic Asset Allocation Room 145\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 9 Investment Strategy II: Managing Risks to the Plan’s Surplus, to Pension Expense, and to Contributions Using the Liability-Matching Asset Portfolio 147\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eShow Me the Money: Risk Control Through the Liability-Matching Asset Portfolio 148\u003c\/p\u003e \u003cp\u003eWhat Liability Should Be Hedged in the Surplus Asset Allocation Process?: Defining Capital Gains and Losses in the Accrued Liability 151\u003c\/p\u003e \u003cp\u003eHurdles to Adoption of Surplus Asset Allocation and to Holding an LMAP Portfolio: Why Isn’t This Easier to Implement? 155\u003c\/p\u003e \u003cp\u003eThe Shape of Investment Strategy for Pension Plans Using Surplus Optimization and the Two-Fund Theorem 158\u003c\/p\u003e \u003cp\u003eConclusion 160\u003c\/p\u003e \u003cp\u003eAppendix: Why Use Dual Durations in the Liability Measures? 162\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 10 Investment Strategy III: Risk Tolerance and the Decision to Hold Risky Assets Over and Above the Liability-Matching Asset Portfolio 165\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eWhy Hold Any Equities or Risky Assets? 165\u003c\/p\u003e \u003cp\u003eCan the Sponsor Afford the Risk if It Happens? One Part of Identifying the Organization’s Tolerance for Risk 168\u003c\/p\u003e \u003cp\u003eVisualizing and Comparing Return\/Risk Tradeoffs Among Alternative Investment Strategy Choices 171\u003c\/p\u003e \u003cp\u003eControlling Economic Risk to the Surplus Equals Controlling Accounting Risks to the Plan 176\u003c\/p\u003e \u003cp\u003eImplementing a RAP in Addition to a Liability-Matching Portfolio 177\u003c\/p\u003e \u003cp\u003eBenefits of Surplus Optimization and the LMAP When a RAP Is Held 178\u003c\/p\u003e \u003cp\u003eConclusion 180\u003c\/p\u003e \u003cp\u003eAppendix: When Is a Plan Truly in Surplus? 180\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 11 Investment Strategy IV: Asset\/Liability Studies—The Conventional Approach 183\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eTraditional Actuarial Asset\/Liability Studies 183\u003c\/p\u003e \u003cp\u003eModeling in the Traditional Actuarial Pension Approach 185\u003c\/p\u003e \u003cp\u003ePossible False Correlations and Bad Investment Strategy Results 186\u003c\/p\u003e \u003cp\u003eDo the Results Prove the Asset\/Liability Method? 187\u003c\/p\u003e \u003cp\u003eManaging the Present Value of Future Contributions through Investment Strategy 189\u003c\/p\u003e \u003cp\u003eConclusion 191\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 12 A Retirement Party for the Required Rate of Return 195\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eVisualizing the Required Rate of Return 197\u003c\/p\u003e \u003cp\u003eThe Effect of Investment Risk on Surplus Risk and Contribution Risk Over Time 200\u003c\/p\u003e \u003cp\u003eEffect of the Required Rate of Return on Investment Strategy 210\u003c\/p\u003e \u003cp\u003eActuarial Confidence in High Expected Returns 212\u003c\/p\u003e \u003cp\u003ePresenting the Gold Watch 214\u003c\/p\u003e \u003cp\u003ePostscript 216\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 13 The Fully Generalized Pension Budget Identity 217\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eThe Inviolability of the FEL 221\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 14 Tough Love: Saving the Underfunded Pension Plan 223\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eAn Action Plan: Something Has to Be Done, but It Isn’t Going to Be Easy 224\u003c\/p\u003e \u003cp\u003eAccounting and Reporting Policy 226\u003c\/p\u003e \u003cp\u003eContribution Policy and Benefit Policy 229\u003c\/p\u003e \u003cp\u003eInvestment Policy and Strategy 234\u003c\/p\u003e \u003cp\u003eMaking These Changes Is Important! 237\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 15 Public Policy Suggestions—Revising Accounting and Actuarial Standards for Pensions 239\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eOnly One Accrued Liability, Please! 242\u003c\/p\u003e \u003cp\u003eArticulation between Financial Statements 244\u003c\/p\u003e \u003cp\u003ePension Expense 244\u003c\/p\u003e \u003cp\u003eSmoothing and Amortizations? 246\u003c\/p\u003e \u003cp\u003ePension Contributions 251\u003c\/p\u003e \u003cp\u003eFinancial Amortization Rather Than Actuarial Amortization 253\u003c\/p\u003e \u003cp\u003eReconfiguring the Elements of Pension Expense on the Income Statement 253\u003c\/p\u003e \u003cp\u003eShould the Pension Trust Be Off the Sponsor’s Balance Sheet, or On? 254\u003c\/p\u003e \u003cp\u003eFinancing the PBGC’s Guarantee, or Financing Pension Plans Directly? 256\u003c\/p\u003e \u003cp\u003eThe IRS and Pension Deductibility 258\u003c\/p\u003e \u003cp\u003eSummary of Public Policy Suggestions 259\u003c\/p\u003e \u003cp\u003eBeyond Managerial Accounting: Should Accounting and Actuarial Regulatory Frameworks Be Changed? 262\u003c\/p\u003e \u003cp\u003e\u003cb\u003eCHAPTER 16 Beyond the Crisis: Making Better Management Decisions and Managing Plans at Lower Risk 265\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eMark-to-Market Accounting Is Not a Reason to Terminate the Plan 266\u003c\/p\u003e \u003cp\u003eThe Intuition Is Already Out There 266\u003c\/p\u003e \u003cp\u003eOur Legacy as Pension Advisors 268\u003c\/p\u003e \u003cp\u003e\u003cb\u003eAPPENDIX A Variables and Terms Used in the Book 271\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eAPPENDIX B Implicit Options in the Pension Plan 277\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eTermination or Default Option 278\u003c\/p\u003e \u003cp\u003ePBGC Put 281\u003c\/p\u003e \u003cp\u003eParticipant Call on Economic Surplus 282\u003c\/p\u003e \u003cp\u003e\u003cb\u003eAPPENDIX C Use of Protective Put Options in the Investment Strategy 285\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eReferences 287\u003c\/p\u003e \u003cp\u003eAbout the Author 293\u003c\/p\u003e \u003cp\u003eIndex 295\u003c\/p\u003e  \u003cp\u003e“Represents a timely and valuable contribution. Waring has been studying pension management for decades, and his sound economic foundation is grounded in reality through his work in the trenches. Drawing on this expertise, he has produced a perfect resource for anyone hoping to understand the practical aspects of measuring defined benefit risks. . . Waring is writing to leave a legacy for pension advisers. He has succeeded in creating one of the definitive works on the structure and management of defined benefit plans. \u003ci\u003ePension Finance\u003c\/i\u003e forcefully dispels any notion that easy solutions exist. No accounting magic or special portfolio strategy can rid companies of underfunding. Although the sobering truth is hard to swallow, Waring’s clarity makes this book essential.”— CFA Institute Publications\u003c\/p\u003e   \u003cp\u003e\u003cb\u003eM. BARTON WARING\u003c\/b\u003e is a financial economist and lawyer, and an active researcher in pension finance and investing. He retired in 2009 from his role as CIO for investment strategy and policy, emeritus, at Barclays Global Investors. Mr. Waring is well known in the pension industry for his many thoughtful and often prizewinning articles. He serves on the editorial board of the \u003ci\u003eFinancial Analysts Journal\u003c\/i\u003e and as an Associate Editor of the \u003ci\u003eJournal of Portfolio Management\u003c\/i\u003e.     \u003c\/p\u003e\u003cp\u003e\u003cb\u003ePENSION FINANCE\u003c\/b\u003e \u003c\/p\u003e\u003cp\u003ePension plans around the world are in a state of crisis. U.S. plans alone are facing a total accrued liability funding deficit of almost $4 trillion (of the same order of magnitude as the federal debt), a potential financial catastrophe that ranks among the largest ever seen. It has become clear that many government, corporate, and multi-employer pension sponsors will not be able to cope with this crippling debt and may default on promised benefits. And many of those sponsors that \u003ci\u003emight\u003c\/i\u003e be able to cope are exasperated by continuous, ongoing negative surprises—large unexpected deficits and higher-than-expected required contributions and pension expense—and are choosing to terminate their plans.  \u003c\/p\u003e\u003cp\u003eBut it need not be so. \u003ci\u003ePension Finance: Putting the Risks and Costs of Defined Benefit Plans Back under Your Control\u003c\/i\u003e walks the reader through the conventional actuarial and accounting approaches to financing pension benefits and investing plan assets, showing that the problems described happen as a natural consequence of the dated methods still in use. It shows in detail how modern methods based on market value will easily minimize these risks: Pension plans can in fact be comfortable for employers to sponsor and safe for employees to depend on for their retirement needs. This book is a must-read for defined benefit pension plan sponsors and employee representatives, plan executives, board members, accountants, fund managers, consultants, and regulators. Research sponsored by the CFA Institute, this book demystifies pension finance, previously accessible only to actuaries. It teaches the topic in lay terms by drawing complete analogies to ordinary transactions such as paying off a mortgage or saving for college. Armed with this book, anyone comfortable with finance and investments in any other context can be comfortable with pension finance and pension investment policy. And further armed with a handheld financial calculator, any layperson can quickly estimate the contributions needed to keep a given plan comfortably solvent, giving them a powerful tool for oversight.\u003c\/p\u003e","brand":"Wiley","offers":[{"title":"Default Title","offer_id":47989759246565,"sku":"NP9781118106365","price":95.0,"currency_code":"USD","in_stock":false}],"thumbnail_url":"\/\/cdn.shopify.com\/s\/files\/1\/1842\/7735\/files\/9781118106365.jpg?v=1761785378","url":"https:\/\/k12savings.com\/products\/pension-finance-isbn-9781118106365","provider":"K12savings","version":"1.0","type":"link"}