How the Costs of Pension Can Affect the Value of a Company - Essay Example

ID: Introduction: Pension schemes are funded by the UK government through trust based company pension programs, state pensions, and contract personal pension programs. Pension programs are governed and managed by a series of complex pension legislations that cover early leaver benefits, disclosure of information, transferability, splitting of pensions in case of divorce, investment rules, and accounting rules (Gustman, Steinmeier, and Tabatabai, 2014). It is important to understand that there is the establishment of a pension’s regulator, who is in charge of overseeing the companies, government organizations, and individuals are able to follow all the legislative requirements regarding the creation and governance of pensions1. This paper analyzes the extent in which the costs of pension are able to affect the value of a company. This research mainly concerns itself with companies operating in the United Kingdom. It is important to understand that this area of pensions is an area that has been greatly researched, not only pensions in relation to the government employees, but also pensions in relation to private companies. Most researchers aim at finding out the benefits of this pension schemes, and the role they play in the economy (Gustman, Steinmeier, and Tabatabai, 2014). Researchers are motivated by the fact that pensions are useful in helping the aged people to have the capability of satisfying their basic needs. Another reason as to why there is considerable interest in this area of pensions is based on the desire by the UK government to decrease the old age poverty in the country. The government has noted that one of the most efficient methods of reducing old age poverty is restructuring the pension system in the United Kingdom2. This new measures must have the capability of addressing new and emerging needs. On this basis, research on the pension systems is developed to address these needs, and provide a framework for policy formulators to develop a policy that would help the citizens of UK fight old age poverty (Mullen, 2010). Pension is defined as an amount of money, paid on a regular basis for purposes of preparing the payee for retirement. Pensions are a very useful welfare programs, and this is because they normally help the aged to meet their daily needs. However, the pension system has always been accused of failing to remove the aged from poverty, since the amount given is always small, when comparable to the standards of living (Gustman, Steinmeier, and Tabatabai, 2014). This is mainly specific to retired public officials. However, scholar denotes that retired private officials normally have better pension packages as opposed to their private individuals. This research paper will look closely at these facts, and establish whether it is true or not. Literature Review: A lot of empirical and theoretical literature concentrates on the benefits of pension to the aged, and how to improve the efficiency of the pension system for purposes of making it affordable to all people in the United Kingdom. For instance, in a recent research, scholars denote that the cost of making sure that the aged get a retirement income from their savings has doubled, for the last 40 years. This is because of the longer life expectancies that the aged live and an increase in the rock bottom interest rates. For example, scholar denotes that in 1974, the cost of an annual 1 pound retirement package was 5.10 pounds, however, in 2014, the cost of providing this 1 pound annual retirement package rose to 11.90 pounds (Galiani and Paul, 2014). This is a very significant increase that limits the number of people who would acquire the capability of accessing services in pension. It is important to understand that the number 11.90 pounds is a representation of the underlying costs that insurance companies demand for purposes of sourcing the payout of the annual annuity3. This is a type of an insurance package responsible for providing an income to the retired individuals for their entire life. Giliani and Paul (2014) denotes that this type of an insurance package is very expensive to some people in the United Kingdom, and this is reflected on the number of people who bought the insurance package in 2013. According to statistics, only 360,000 people were able to buy this insurance package, guaranteeing their income for life. This is as opposed to the millions of workers who could have purchased this policy had it been cheaper and affordable. Scholar further goes on to denote that annuities are always characterized in controversies. For instance, in 2013, Galiani and Paul (2014) denotes that insurance firms were able to offer a 65 year old person with 100,000 pounds annuity, just 5,500 pounds a year. This is a significant drop when it is compared to the 1990s, when insurance firms were offering 15,000 an annual income of 15,000 pounds, to holders of 100,000 annuities. It is important to denote that, for a longer period of time, annuities have been the only method that aged people could access retirement funds, that are save outside the final salary scheme of a company. Gustman, Steinmeier, and Tabatabai (2014) denotes that insurers exploited this concept of annuities; as a result a large number of citizens of UK were placed into inappropriate retirement packages or contracts. However, scholar denotes that the insurance firms normally experience expensive costs, when it comes to sourcing for services in annuity. On this basis, they are justifiable when they offer such a low income payment to policy holders. Others indicate that due to inflation, it is not wise to compare an annuity that costs 100,000 pounds in the year 1990s, to an annuity that costs 100,000 pounds during the periods of 2000s (Galiani and Paul, 2014). However, scholars denote that annuities are the best method of providing life time income services to the aged. This is because annuities are able to solve two major dilemmas that pensioners could find themselves in. One dilemma is how much money a pensioner should get each year, and the taking of risks in investing the money under consideration. According to scholar, if a pensioner is cautious about risk taking, then chances are that the pensioner will not make a considerable gain, however, if a pensioner takes too much risk, then chance are high that the pensioner will loss the money, remaining with nothing (Gustman, Steinmeier, and Tabatabai, 2014). To make retirement packages more affordable to its citizens, the government of the United Kingdom has sponsored a variety of studies, aimed at developing alternative policies that would help in improving the manner in which old people are able to access pension. One of the methods that the government of UK intends to introduce is to allow its citizens to have the capability of switching their pension policies, in case they are not satisfied with a policy on offer. Scholar denotes that the government hopes that by introducing this system, a large number of pensioners will have the capability of identifying a suitable pension package that will serve their needs (Gustman, Steinmeier, and Tabatabai, 2014). The government also hopes that by introducing this policy, exploitation of its citizens by insurance organizations will stop. This is because a number of packages will be developed, that have the capability of replacing the annuity system operated by insurance agencies. Scholar denotes that the costs of accessing pension services are not only borne by private individuals. This is because British companies are also allowed to develop and manage their own pension funds. In research conducted by Mullen (2010), results indicate that British Companies run a pensions program referred to as defined benefit schemes. Scholar denotes that a defined pension policy, is a type of a pension scheme whereby a company gives a promise to pay a particular monthly money to a retirement fund, on behalf on an employee. The amount of money paid is determined by a formula developed by the company, and it is based on the earning history of an employee, the tenure of service that the employee under consideration acquires, and the age of an employee. Unlike annuities, scholar denotes that defined benefits schemes do not depend on the rate of returns for purposes of providing pension packages to employees. Sjöberg (2014) indicates that this pension program by companies in the United Kingdom is responsible for stifling the investment capability of these companies. This is because companies use a lot of money to pay for pension funds, as opposed to using the same money to look for other opportunities to invest their profits. On this basis, without a sound and good financial management practices, it would be very difficult for an organization to achieve growth. It is important to understand that the expansion of companies in the United Kingdom is important for the economic growth of the United Kingdom. On this basis, the government of the United Kingdom is concerned about these costs, and aims at initiating measures of reducing these costs (Gustman, Steinmeier, and Tabatabai, 2014). On this note, the government of the United Kingdom is not only concerned about individual pensioners, but also about companies offering defined benefits scheme. The government aims at encouraging these companies to continue with their policies, as well as looking at measures on how they can reduce the costs associated with implementing these policies. This research will seek to identify how the pension costs of company affects their operations, and this paper will provide a recommendation. Research Methodology: In collecting data, the researcher will use qualitative method of data collection. The methods that the researcher will use includes review of documents, mainly books, journals, and newspaper articles, and interviews. It is important to understand that before collecting data through this methodology, the researcher has to plan and test the efficiency and reliability of various research methods under qualitative data analysis (Cooper and Pamela, 2008). Through this research, the researcher aims to analyze the extent in which the cost of a pension will affect the value of a company. On this basis, the researcher will have to develop a framework that will guide him in collecting certain type of information from an interview, and certain type of information from the review of documents. For example, one are of this research would include looking for actual information on how the costs of pensions affected the value of the company. This would force the researcher to review articles such as journals, books, and newspapers for purposes of finding the information under consideration (Cooper and Pamela, 2008). The other phase of this research would include looking for information on the experiences of company management on managing various pension funds. This would force the researcher to use an interview for purposes of collecting data under consideration. It is important to denote that qualitative data methodology has a lot of advantages to the researcher. One advantage is that the researcher will have the capability of collecting in depth information concerning the area of research. Qualitative data is also important because it would help the researcher to give an explanation on why a particular response was given (Cooper and Pamela, 2008). This is more so, when it comes to the results obtained in an interview. However, the most limiting factor under qualitative research is that it is time consuming. On this basis, conducting a quick interview on the area of research won’t provide enough information that has the capability of answering the research questions. Data: The data to be used in this research will emanate from the results obtained from the interviews, and article reviews. It is important to denote that the researcher will mainly concern himself with information emanating from leading companies in the United Kingdom. These companies must be operating under the energy, retail, and manufacturing sectors. It is important to understand that it would be easier for the researcher to get information concerning the costs of running pension programs by these firms. It is also a common knowledge that bit is the large companies in the United Kingdom that are responsible for operating the defined benefits program. This is a very important area that the researcher will have to analyze in order to get the real impact of pension funds, to the value of the company. Methods: a. Interviews: During this process of data collection, the researcher will use interviews. The researcher will use a person to person type of interview. Under this methodology of data collection, the researcher will use both structured and semi-structured models of interviewing. Structured model of interviewing involves a situation whereby the researcher will have a series of pre-determined questions that the researcher will ask the interviewees (Hennin and Bailey, 2011). It is important to understand that the population for the interview would include senior scholars of finance, and accounting officers at the following leading institutions in the United Kingdom, Wall Mart, Lindum Group, Waitrose, and Sainsburys. The following are the structured questions that the researcher will ask, Does your company have a pension policy for its employees? What policy does is it? Is the policy effective in serving the needs of the organizations employees? Does the policy under consideration serve the need of the company? How does the policy identified affect the company, in terms of its value? During this period of carrying out an interview, the researcher swill also asks some open ended questions, which are not pre-determined. These questions will arise out of the answers given by the interviewee. During this process of data collection, the researcher will use a digital tape recorder to record the interviews and preserve them. It is important to understand that this method of data preservation is important because information will be preserved without any distortions. On this basis, information used will be reliable. Article Reviews: Under this method, the researcher will have to review books, journals and newspapers for purposes of finding information that is useful for the research. While looking for books, the researcher will have to conduct a library search on famous scholars of finance, as the information they provide will be relevant and reliable (Bryman, 2008). Journals on the other hand are important and this is because they are peer reviewed, for purposes of finding their accuracy and reliability. The sources of journals that the researcher will rely on include Jstor and Ebsco. The researcher will also rely on newspaper articles, for purposes of finding the various pension programs that companies have, and their impact. Ethics: In conducting this research, the researcher will have to follow certain ethical considerations, and this includes informing the participants on the reasons for the research, and using the information obtained for the correct purposes. Other ethical considerations will include giving out a correct analysis of the results of the interview, without exaggeration. Expected Findings and Potential Implications: The expected result of this research is that pension programs operated by large companies greatly affects their values to the negative. These firms are unable to maximize on their capital pools, and this is because they contribute a large percentage of it to the pension funds. The implications of this research is that the researcher will give a series of proposals, that if well utilized, will help large organizations to develop pension programs that will not negatively affect the value of their organizations, as well as effectively catering for the needs of their employees. Bibliography: Bryman, A, 2008: Social research methods. 3rd ed. Oxford: Oxford University Press. Cooper, D., and S, Pamela, 2008: Business research methods. 10th ed. Boston: McGraw-Hill Irwin. Cooper, D., and Pamela S, 2010: Business research methods. 11th ed. New York: McGraw- Hill/Irwin. Galiani, S, and G Paul , 2014: . Non-contributory pensions. Cambridge, Mass.: National Bureau Of Economic Research. Gustman, A, T Steinmeier, and N Tabatabai, 2014: "Mismeasurement of pensions before and after retirement: the mystery of the disappearing pensions with implications for the importance of Social Security as a source of retirement support." Journal of Pension Economics and Finance 13.01: 1-26. Hennink, M, and A Bailey (2011). Qualitative research methods. London: SAGE. Mullen, H. 2010: Pensions backgrounds, trends, and issues. New York: Nova Science Publishers. Sjöberg, O, 2014: "Old-age pensions and population health: A global and cross-national perspective." Global Public Health 9.3 271-285. Read More