Defined Benefit Pension Plans: Blue‐Chip Benchmark

AuthorKaren M. Oxner,Thomas H. Oxner
Date01 January 2018
Published date01 January 2018
© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22308
Defined Benefit Pension Plans:
Blue-Chip Benchmark
Karen M. Oxner and Thomas H. Oxner
Defined ben-
efit pension plans
provide guaranteed
income to retirees,
and these plans are
typically offered by
large companies and
governmental units.
Unfortunately for the
sponsoring employ-
ers, the plans involve
accounting and dis-
closure requirements
that are complex and
extensive. This article
provides an overview
of the accounting
requirements, many
of which are depen-
dent on estimates.
Although many
estimates used in pen-
sion accounting are
provided by outside
actuaries, it is never-
theless the responsi-
bility of management
to ensure that pen-
sion accounting and disclo-
sures are fairly presented and
complete. Benchmarking is
used effectively in many aspects
of business, and accounting
information can also be bench-
marked. To improve the infor-
mation available related to pen-
sion estimates, selected pension
data for the companies in the
Dow Jones Industrial
Average (DJIA) is
presented as further
described below.
In addition to
specialized account-
ing rules, defined
benefit pension plans
create a financial
obligation for the
sponsoring employ-
ers regarding their
ability to provide
the promised cash
payments to retir-
ees as they become
due. From a practi-
cal perspective, two
strategies to meet
this obligation are
to earn high returns
on the plan assets
and/or to liberally
fund the plan. This
study compares rates
of return actually
earned on plan assets
to the long-term
expected rate of
return. In addition,
the funded status of the plans is
examined to determine whether
the plans tend to be under- or
overfunded. Funded status
is one indicator of the risk
Since accounting for defined benefit pension
plans involves many estimates, having benchmark
information is important to financial statement
preparers, as well as to their auditors and actuar-
ies. This article provides an overview of defined
benefit pension plans for the 20 companies in the
Dow Jones Industrial Average (DJIA) who have
such retirement plans for the 2016 reporting
period. A brief description of pension accounting
rules is provided, and then analysis of selected
components of pension expense for these 20
companies is presented, including expected return
on pension plan assets, actual return, and the pen-
sion discount rate. Actual returns are compared
to expected returns for the most recent six-year
period to determine if expected returns are real-
istic. The discount rate is compared to projections
of long-term interest rates for reasonableness.
Finally, the funded status of the defined benefit
pension plans is examined and shows that all
but three firms in the sample are underfunded.
The possibility for interested parties to use these
findings for benchmarking other pension plans are
explored in the article. © 2018 Wiley Periodicals, Inc.
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