Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
8 Cards in this Set
- Front
- Back
QBS 4: 1 of 8
Advantages of VBO accounting over PBO accounting |
1) Immunizes employees so don't bear brunt of plan design changes
2) Clarifies employment contract 3) Reduces dependency on ambiguous implicit contracts 4) Minimizes opportunities for gaming 5) Reduces the threat and cost of regulation 6) Provides transparency to investors 7) Gives management more plan design flexibility 8) Would illuminate total cost of plan amendments immediately to shareholders 9) Avoids moral hazards |
|
QBS 4: 2 of 8
Types of contract risks faced by employees |
1) Demographic risk
2) Firm-specific risk 3) Moral hazard |
|
QBS 4: 3 of 8
Principles behind contracts |
1) Increasing employment contract risk may be efficient up to a limit
2) Exposing employees to moral hazard is generally inefficient |
|
QBS 4: 4 of 8
DB plan contract design from an employer and employee perspective |
1) Compensation is withheld
2) Trains employee to enhance future productivity 3) Motivates them to perform under the risk of losing value withheld 4) Rewards them at retirement |
|
QBS 4: 5 of 8
What is the one way to identify a frail plan design (i.e. frail pension contract)? |
- ABO significantly larger than VBO
- Puts employee's compensation at risk/creates a moral hazard - Employees will demand higher pay in this situation |
|
QBS 4: 6 of 8
Frail design features |
1) Subsidized early retirement with cliff eligibility
a) A window can be a more efficient method of achieving a similar purpose 2) Revocable benefit promises a) e.g. retiree medical cut backs or rescissions 3) Past service benefits 4) Plan shutdown benefits a) Laying off members before plan shutdown 5) Cash balance conversions |
|
QBS 4: 7 of 8
Benefit design features that reduce post-employment frailty |
1) Fund individual accounts
2) Modest class-year vesting 3) Full vesting at an age when retention is no longer a goal |
|
QBS 4: 8 of 8
Moral hazard provides opportunity for exploitation which if acted on can? |
1) Diminish employee morale
2) Increase turnover 3) Cause recruiting difficulties 4) Lead to lawsuits |