Johnson & Johnson—Retirement Obligations

2463 words 10 pages
Johnson & Johnson—Retirement Obligations
a. i. An employer with a defined-contribution plan pays into the plan either an annual lump-sum per employee or calculates payments based on the employees‟ current wages and or time of service with the firm. Under such a plan, the employer does not guarantee the future amounts employees will receive when they retire. The employees covered by a defined-contribution plan assume the risk for the pension plan‟s financial performance. Under a defined-benefit plan, the employer specifies the size and timing of the payments that the employees will receive when they retire. Typically, these retirement benefits are commensurate with the wages earned by the employee in his or her last few years of employment
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The rationale for the difference (actual versus expected) is that temporary fluctuations in the return on the plan assets do not reflect long-term performance and should not impact net income. Markets can be down one period and up the next, but on average, investments will earn a reasonable (average) return in the longer-run. Corporate executives prefer to report smoother earnings and prefer to avoid recording as income „temporary‟ changes in the value of pension plan assets. They argue that this makes earnings more predictable and steady. If firms were required to record actual return on the income statement, firms might invest in less risky securities and in the long run that could harm the pension plan participants. e. The other post-employment benefit (OPEB) obligation is similar to the pension obligation in that it represents a liability for benefits associated with employees‟ service. The OBEB liability increases as a result of OPEB expense (the service and interest components) as well as actuarial changes in assumptions and plan amendments. The OPEB obligation decreases when benefits are paid. There are two significant differences between the other retirement obligation and the pension liability. First, Johnson & Johnson has not funded the OPEB obligation because there are no legal requirements to do so. Second, the company may make changes to the OPEB plan more easily than to the pension plan. It is not uncommon for companies to curtail or even


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