Defined Benefit Pension Plans

Understanding the Differences Between the Public and Private Sector

Kathryn E. Easterday, PhD, CPA, and Tim V. Eaton, PhD, CPA

Accounting and financial reporting for defined benefit (DB) pension plans provide needed information to a wide variety of corporate and governmental stakeholders, including active workers, retirees, investors, voters, and taxpayers. DB pensions represent an employer's real obligations to its active and retired employees—promises that must be honored. Unfortunately, the pension obligations of many organizations are outpacing their ability to fund them. In the case of the American Airlines bankruptcy, the company reported approximately $8 billion in pension assets to cover $18 billion in pension obligations to its employees (Mike Spector, “Filing Puts Pension Benefits at Risk,” Wall Street Journal Online, November 30, 2011). The third quarter of 2011 was the second-worst quarter in history for corporate pensions because plunging market prices dramatically devalued invested pension plan assets, creating or exacerbating underfunded pension obligations (Vipal Monga, “The $440 Billion Pension Gap,” Wall Street Journal Online, November 30, 2011).