When accounting on the balance sheet for pension obligations if it is
a defined benefit plan than an amount of underfunded liability is
described as pension cost liability and if overfunded then it is a
prepaid pension cost asset. Pensions are much more stable in
predicting than other post retirement benefits and usually have a
higher discount rate. Usually to be fully vested in a pension the
employee had to complete a longer service life where as they might
have to work for the company for a shorter timeframe in order to
qualify. GAAP requires companies to use accrual methods for both
pensions and other post retirement benefits. There is a formula for
both pensions and other retirement benefits which falls along similar
lines. Service cost + Interest Cost - return on assets + amortization of
prior service cost + or - Gain or Loss ( or for other benefits then
amortization of gain or loss)= Pension expense or OPRB expense.
As an employee, a post retirement benefit of health insurance can
prove to be the bigger asset than an annuity or life insurance because
of the fluctuations in medical costs and the opportunities to secure
income streams outside of the pension. For employers health
insurance is the most significant cost but will serve as a very
attractive option and can increase employee retention significantly.
Also, the employee may become eligible for medicare, pass away
early, maintain good health or the benefit maybe retractible or vary in
cost if the company has the option to increase/decrease deductibles
or coverages.
The calculation for pensions are generally factored based on an
employee's salary where as the post retirement benefit is generally
standardized without that respect. So each employee's liability maybe
be uniform. Pension payments are steady other than COLA
adjustments and Health insurance costs are highly variable. But one
of the biggest differences between pensions and OPRB is that
pensions are built off stocks, bonds, investments where they attempt
to help the pension raise funds through interest, dividends and capital
appreciation where as the OPRB is often times simply funded through
an allocated cash account.
Smith, Jack (1993) Pension and other Postretirement Benefits:
Accounting Similarities and Differences,
http://archives.cpajournal.com/old/14152804.htm
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate
Accounting: Reporting and analysis. Boston, MA: Cengage Learning
