Fundamentals of private pensions

Description

The first edition of this book appeared more than 40 years ago in 1955. It reflected the state of the pension art at that time or, at least, the author's perception of the prevailing state. The book contained 209 pages of text compressed into five long chapters. During the intervening years, the private pension institution has expanded enormously in scope, diversity, and complexity. The successive editions of this book have mirrored the changes in the field, especially the increasing diversity and complexity. This edition bears little resemblance to the original. At the time of its publication, the original edition was thought to be a comprehensive and authoritative exposition of existing theory and practice in the design and operation of employer-sponsored retirement programs. It won the coveted Elizur Wright Award of the American Risk and Insurance Association as the outstanding original contribution to pension literature in the year of its publication. Yet by today's standards, the book would be considered relatively elementary and naive, particularly the portions dealing with the actuarial and financial aspects of pensions. Each revision has been a major undertaking, reflecting interim developments and a refinement of concepts and terminology. The second edition, published 10 years after the first, was necessitated by the evolution of pension practices. As the preface to that edition stated: "Plan provisions have been refined, new types of funding instruments have been developed, investment policies have been expanded, new tax rulings have been issued, and more meaningful terminology has evolved." A third edition, published in 1975, was necessitated by the enactment of the Employee Retirement Income Security Act (ERISA), even though it would have been justified by other forces and events. The third edition was more than a revision; it represented a recasting and rewriting of most of the materials in the second edition. More emphasis was placed on the rationale for various practices in plan design and financing, including the advantages and disadvantages of the various approaches. The requirements and standards of ERISA were dealt with as appropriate throughout the book. The presentation in this edition was based on the legislative language and history of ERISA since no regulations or interpretive rulings had been issued before the book went to press. The major thrust of the fourth edition, brought out only four years after its predecessor, was to update the book in the light of the manifold regulations, rulings, and interpretations issued by the Internal Revenue Service, Department of dealing with actuarial considerations was completely rewritten and expanded, with new terminology and a new framework for the analysis of actuarial cost methods. New chapters on profit-sharing plans, thrift plans, and the federal tax treatment of qualified asset accumulation plans were added. Finally, new developments, such as guaranteed income contracts of life insurers, were recognized, and refinements of various sorts were introduced. In recognition of the mushrooming volume of pension plan assets and the responsibilities associated with their investment, the fifth edition, published in 1984, added chapters on investment policy and operations. This edition also included a discussion on accounting for pension plan costs and liabilities, a subject of growing importance and controversy. Individual account plans of various sorts were given expanded treatment, and this necessitated the addition of a new chapter on individual retirement accounts and voluntary employee contributions. The material on plan benefits insurance was completely rewritten to incorporate the changes introduced by the Multiemployer Pension Plan Amendment Act. A section on stochastic modeling was added to the chapter on forecasting plan costs, liabilities, and cash flow. The material was again updated to reflect changes in applicable law and business practices. Like the previous revisions, the sixth edition, published in 1989, contained much new material. Repeated rounds of federal legislation during the 1980s had touched almost every aspect of pensions, and the text had to be substantially changed throughout. Court decisions, together with new regulations and guidelines from the regulatory agencies, also necessitated extensive changes. The chapter on accounting was completely rewritten to reflect Statements of Financial Accounting Standards No. 87 and No. 88 of the Financial Accounting Standards Board. Further revision had to be made because of changes in the types of contracts used by insurance companies and changes in other areas. This seventh edition is once again necessitated by the evolution of the pension environment. Since 1989, we have seen the continuing development of new legislative and regulatory initiatives that have affected retirement programs. These include the Technical and Miscellaneous Revenue Act of 1988, the Omnibus Budget Reconciliation Act of 1989, the Omnibus Budget Reconciliation Act of 1990, the Older Workers Benefit Protection Act of 1990, the Unemployment Compensation Amendments of 1992, the Omnibus Budget Reconciliation Act of 1993, the Family and Medical Leave Act of 1993, the Uruguay Round of the General Agreement on Tariffs and Trade, and the Uniformed Services Employment and Reemployment Rights Act of 1994. We have also seen new changes in the structure and design of plans as employers attempt to deal with the needs of workers and the cost of operating their benefit programs. This edition represents a major restructuring of the materials included in the earlier editions. For example, the discussion on the structure of defined benefit and defined contribution plans has been reorganized in a way that should facilitate the understanding of those plans. This edition also includes a great deal of new material. Over the last 10 to 15 years, a substantial economics literature on the operations of employersponsored retirement programs has evolved. Chapters have been added that address the economics of the tax incentives provided to retirement programs and evaluate the varying human resource incentives in defined benefit and defined contribution programs. We have also significantly expanded the discussion and development of retirement income adequacy measures that date back to the first edition of the volume. The current volume is organized into five main sections dealing with a variety of separable pension issues. It is organized in this fashion to enable the reader to use the volume as a text, a research tool, or a general reference. Chapter 1 stands alone as an introductory discussion on the historical evolution of the pension movement and how pensions fit into the patchwork of the whole retirement income security system in the United States. By necessity, this chapter is a very general discussion and many of the issues that are touched upon there are discussed in much greater detail elsewhere in the volume. Section 1 (Chapters 2 through 9) lays out the regulatory environment in which private pension plans operate. Section 2 (Chapters 10 through 15) investigates the various forms of retirement plans that are available to workers to determine how they are structured in practical terms. Section 3 (Chapters 16 through 21) focuses on the economics of pensions. Much of the material covered in this section of the volume did not appear in prior editions and includes discussion of the growing body of economic literature on the operations of employer-sponsored retirement plans that has arisen in recent years. Section 4 (Chapters 22 through 28) explores the funding and accounting environments in which private employer-sponsored retirement plans operate. The concluding section (Chapters 29 through 34) investigates the handling of assets in employersponsored plans and their valuation as well as the insurance provisions behind the benefit promises implied by the plans. The order of the sections in this volume might not be appropriate for some readers. The student coming to the study of pensions for the first time likely will need to understand the regulatory environment and structure of plans before turning to a detailed understanding of why employers sponsor plans or how they fund them. Those with a general knowledge of the regulation and structure of pension plans might want to jump past the first two sections and first turn to the discussions on the economics of pensions in order to understand why employers sponsor plans and operate them in the fashion that they do. Others who are more interested in the actuarial issues important in the operation of defined benefit plans might want to jump to later sections of the volume first. Those interested solely in the regulatory environment might not be interested in the section on the economics of the plans at all. The grouping of the chapters should allow diverse groups of students with widely varied interests to focus most intently on the elements of pension fundamentals that are important to each of them. The first five editions were developed under the sole authorship of Dan M. McGill. The sixth edition was developed under the coauthorship of Dan M. McGill and Donald S. Grubbs, Jr., who was a collaborator in prior editions. This seventh edition is coauthored by Dan M. McGill, Kyle N. Brown, John J. Haley, and Sylvester J. Schieber.