Question

Governments and companies around the country are struggling with the funding of pensions. These entities need to ensure they meet their future obligations to an aging workforce. To ensure future obligations (pension payouts) are met, governments and companies need to currently contribute assets to the pension fund and ensure the assets earn an appropriate return. Not only do you need the assets to invest now, but you need to ensure they earn an acceptable return. The decision of how to invest pension funds is of incredible importance to society. If pension funds are misappropriated, this can have devastating effects on the lives of the beneficiaries, their families, and the economy as a whole. Read the following case and answer the related questions.

TheseCraig Brokaw, newly appointed controller of STL, is considering ways to reduce his company’s expenditures on annual pension costs. One way to do this is to switch STL’s pension fund assets from First Security to NET Life. STL is a very well-respected computer manufacturer that recently has experienced a sharp decline in its financial performance for the first time in its 25-year history. Despite financial problems, STL still is committed to providing its employees with good pension and postretirement health benefits.

Under its present plan with First Security, STL is obligated to pay $43 million to meet the expected value of future pension benefits that are payable to employees as an annuity upon their retirement from the company. On the other hand, NET Life requires STL to pay only $35 million for identical future pension benefits. First Security is one of the oldest and most reputable insurance companies in North America. NET Life has a much weaker reputation in the insurance industry. In pondering the significant difference in annual pension costs, Brokaw asks himself, “Is this too good to be true?”

a. Why might NET Life’s pension cost requirement be $8 million less than First Security’s requirement for the same future value?

b. What ethical issues should Craig Brokaw consider before switching STL’s pension fund assets?

c. Who are the stakeholders that could be affected by Brokaw’s decision?

Answer 1

Requirement a

The worth of currency would only recommend that the company NET Life’s discounted rate was poorer than other company which is First security. Net Life is creating anticipations about growth, the life expectation with in the work force, the yields on annuity funds and most notably the future salary and wage levels. Net Life can activate at lesser gross and net margins and contemplate about providing scarcer services.

Requirement b

Brokaw has a reliable role to the existing and forthcoming pensioners of the company. Which marks him accountable for promise that the pension assets are adequately funded and are totally sheltered from controllable risk. He is also answerable for the economic condition of STL which comprise of finding moral ways of raising the profits of the company.

Requirement c

The stakeholders that could be affected by his judgment would be the president and the forthcoming retirees.