What are the similarities and differences between pension benefits and OPEB ?

 

A pension plan is a retirement plan that requires an employer to make contributions to a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the worker upon retirement.

In addition to an employer's required contributions, some pension plans have a voluntary investment component. A pension plan may allow a worker to contribute part of his current income from wages into an investment plan to help fund retirement.

while

Other post-employment benefits (OPEBs) refer to non-pension benefits (i.e., retirement income) paid to a retiree.

OPEBs may include health insurance coverage, life insurance, or deferred compensation to a retiree.

Below i have detailed for you the similarities and differences for pension plan and Other post-employment benefits, please check them out;

Step-by-step explanation

Let us start with Similarities, I have stated a similarity and a simple example for the same

The net pension/postretirement benefit cost consists of Service Cost. Service costs for both pensions and OPERBs are the portion of the PBO or EPBO attributed to employee service for that period.

The example of a calculation is as follows:

PENSIONS: $38,575 x 1/12 = $3,215. (Note that the use of 1/12 for pensions is merely a short cut method)

HEALTH CARE: $130,733 x 1/29 = $4,508.

Interest Cost, As with other obligations, the amount of the liability grows each year by an interest factor. For postretirement accounting the interest component is measured by applying the discount rate to the beginning balances of the PBO for pensions and the APBO for other postretirement benefits.

Please check out an example of the interest cost:

PENSIONS: $32,741 x 8% = $2,619

OPEBs: $42,568 x 8% = $3,405

Return on Plan Assets. For both pensions and other postretirement benefits, the return on plan assets is the increase (or decrease) in the fair value of the plan assets from the beginning to the end of the year adjusted for contributions and benefit payments.

An example will be like, the contribution to the pension plan for the current year was $5,000. Since our single employee is not retired, no pension benefits were paid. Thus, the actual return was $1,500 determined as follows:

Plan assets December 31, 1992 $31,000

Plan assets January 1, 1992 24,500

Total increase in fair value 6,500

Less: contribution 5,000

Actual return on plan assets $1,500

Differences

While a large portion of the two standards on postretirement benefits are similar in concept and mechanics, there are several important differences.

For pensions the retirement benefits are fixed in amount by the terms of the contract and only the term is unknown. The benefits for health care plans are more difficult to estimate since not only is the term unknown, but also the benefits are dependent upon health care costs at the time care is provided.

Amendments for pensions are amortized over the remaining service life of the employees, while for OPEBs amendments are amortized over the period of time until full eligibility, a much shorter time span.

Pension accounting requires the recording of an additional liability when the accumulated benefit obligation exceeds the fair value of the plan assets. OPEB accounting does not have such a requirement.

The transition obligation for pensions is amortized over the average remaining service life of the employees expected to receive benefits, or if this period is less than 15 years, 15 years may be used. For OPEB the transition obligation may be recognized immediately, or it may be amortized over the average remaining service life of the employees expected to receive benefits (or if this period is less than 20 years, 20 years may be used).

Finally, OPEB accounting requires the disclosure of the amortization of the unrecognized transition obligation as a separate component of net periodic cost, the effect of a one percentage point increase in the assumed health-care trend rate on the accumulated benefit obligation, the service cost, and interest cost. No similar requirement exists for pensions.