Considering Changes to Your Company’s Pension Plan?

By Baker Newman Noyes May 8, 2012

The current economic conditions are forcing many employers to seek creative ways to reduce costs. This trend is forcing some to closely review their current benefit packages. Many that offer defined benefit pension plans are finding they have to consider whether they can continue to offer this benefit to their employees.

When significant changes are made to a defined benefit pension plan, there are two types of accounting scenarios that may come into play:

• A curtailment is an event which significantly reduces the expected years of future service of current employees; or eliminates the accrual of defined benefits, for a significant number of employees,  for some or all of their future services (for example, terminating or suspending a plan so that employees do not earn additional benefits for future services). The termination of a defined benefit pension plan, with either no replacement or replacement by a defined contribution plan, also results in a curtailment because employees’ future services will not earn defined benefit pension credits.
• A settlement is an irrevocable action which relieves the employer and/or the plan of primary responsibility for a pension benefit obligation and eliminates significant risks related to the plan obligation and the assets used in the settlement. Examples of settlement transactions include making lump-sum cash payments to plan participants in exchange for their rights to receive pension benefits, purchasing nonparticipating annuity contracts through which an insurance company assumes the obligation for payment of pension benefits, and transferring a portion of the pension plan’s assets and obligations to another company.

The above determinations can be difficult in some situations and require careful consideration of the specific facts and related impacts. Stay tuned for future articles which will discuss the accounting impacts and recognition of these events.