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Case Title:

American Pension Funds' Fiasco: The Bailout

Publication Year : 2004

Authors: Ananda Prasad & G Srikanth

Industry: Banking, Insurance and Financial Services

Region:Global

Case Code: GBE0023

Teaching Note: Not Available

Structured Assignment: Not Available

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Abstract:
American pension funds performed extremely well during the stock market boom in the 1990s prompting both the institutional and the individual investors to bet their savings on the stock market. Corporates were even more aggressive; they ignored the basic accounting principle 'conservatism' and assumed 'discount rate' that suited them the best when calculating their pension liabilities. When the stock markets produced less than the normal returns, these pension funds went belly-up. American Congress passed the 'Pension Funding Equity Act 2004'. Nevertheless the problem remains to be tackled.

Pedagogical Objectives:

  • To discuss the importance of 'diversification of portfolio' and the centrality of 'discount rate' when calculating the present value of future obligation
  • To discuss the effectiveness of bailing out public or private financial institutions.

Keywords : American pension funds bailout, Pension Funding Equity Act (HR 3108), Pension Benefit Guaranty Corporation (PBGC), Internal Revenue Code, Pre tax contribution, 401(k) pension plan, Congressional Budget Office (CBO), Premium receipts, Cash-balance plans, Enron pension funds, Defined benefit (DB) and defined contribution (DC), Employee pension plan, Labour department, Restructuring of benefits, Finance Case Study, Funded corporate pension plans

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