Defined benefit pension plans in the United States are established and maintained with noble intentions, providing valuable retirement benefits to employees. Yet these plans are anything but straightforward in terms of the impact on their sponsors. The ultimate cost of providing a defined benefit stream is never known up front and depends greatly on strategic choices made by the sponsor as well as macroeconomic factors outside the sponsor’s control.
And indeed, market volatility and plummeting liability discount rates have created pension cost headwinds for both the income statement and the balance sheet. In a given year or quarter, these negative effects can be isolated and managed as one-time, line item expenses. However, over longer periods, their cumulative impact can be significant, greatly curtailing a company’s ability to direct precious funding resources to core operations and future capital investments.
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