Pension Plans in the UK & the US

There are two general types of pension plans (retirement benefit plans). The first type requires a stipulated contribution (by an employer or by a combination of employer and employee) to a pension plan. Payouts from such plans are largely determined by the value of the fund (or the value of an employee's share of the fund). This type of pension plan is referred to as a defined contribution plan (Bodie, 1990, pp. 11- 22).

The second general pension plan type stipulates the categories and amounts of benefits that will be paid upon retirement. Benefit levels are not contingent (directly) on the asset value of the pension fund at any given time point. This type of pension plan is referred to as a defined benefit plan (Bodie, 1990, pp. 11-22).

Retirement Benefit Plan Accounting Standards and Requirements

Financial accounting practices with respect to employer administered pension plans were established in both the United Kingdom and the United States in the 1960s. Generally, in each country employers are required to administer employee pension funds by selecting an accounting basis that permits the firm to:

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e the employer make certain payments to a trust under the plan on behalf of the employee, or to the employee in cash. Possibly the most significant of the provisions of the regulations included in Section 401(k) deal with discrimination by employers between highly paid employees and other employees, and with early withdrawal by individuals from a qualified plan in the United States. To remain qualified, a plan must meet a nondiscrimination test, the intent of which is to assure that highly paid employees or executives are not disproportionately rewarded in comparison with other employees, as Section 401(k) defines disproportionate. The early withdrawal of funds from a qualified plan under ordinary circumstances in the United States subjects the withdrawals to federal income taxation, and disqualifies the plan (Werner, 1988, p. 129). The final regulations under Section 401(k), however, enumerate specific hardship circumstances, under which individuals in the United States are permitted to withdraw funds from a plan without risk of disqualification. The United States revised its pension fund accounting procedures in 1985, with the issuance of Financial Accounting Statement (FAS) 87. Pension fund liabilities
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