Many companies with defined benefit plans are curtailing or eliminating the plans altogether. With a defined benefit plan, the company guarantees some set amount (or formula-determined payment) when the employee retires. Because most pension assets are invested in the stock market, whether a pension plan is fully funded often depends on the strength of the stock market. Because of this volatility, companies often find themselves unexpectedly in a position where they must either increase funding or disclose significant underfunding.
Because of this, many companies simply reduce or eliminate the plan. Consider the pension plan of Golden Years Company (GYC). Historically, GYC has been a great company to work for, with strong employee benefits. GYC's pension liability is approximately $15 million. However, recently the company has been experiencing minor financial troubles in a decreasing stock market and, consequently, announced the termination of the pension plan in an effort to save costs. However, the pension plan was fully funded by
$9 million (the fair value of assets exceeded the expected liability).
1. How does the firm reconcile the trade-off between financial performance and the responsibility to its employees?