Pension Liability Issue and Employee Retirement Income Security Act

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The Pension Liability Issue
Pension liability refers to the fact that a private company or national government have to account for making payments on pensions in future. The accounting methods used vary and high amounts of liabilities can lead to the closure or insolvency of a business on paper. The liability here is not the future pension payment obligations by a company or national government, but the difference between the future payment amount and the amount of money earmarked by the company for making such payments (Waring, 2011). However, the issue for companies is that these growing liabilities are forcing company executives and board members to spend more time managing the future retirees' obligations at the expense of conducting actual business. This, therefore, moves the issue of managing pension risks to discussion agendas with investment bankers traditionally focused on the allocation of capital (debt repayments, dividends, and acquisitions) (Waring, 2011).
Accounting for the Pension Fund
Pension funds comprise of a lot of long-term liabilities and funding is not shown in the Balance Sheet, however, reporting is crucial. Accounting for pension funds is complex, and requires an understanding of the basic types of funds. Understanding the types of funds permits the analysis of companies and the means the companies manage such funds. There are two types of pension funds that are defined contribution plan and defined benefit plan (Camfferman & Zeff, 2007).
In defined contribution, the company contributes to the plan but does not guarantee the value of future benefits to the employee. In defined benefit, the employee has the knowledge of the benefit terms to be ...