Analysis Of Correlative Relations Between Corporate Pensions And Company Operations

The modernization of China is accompanied with an aging society, which results in a gap in the social endowment insurance system. In the international "three pillars" social endowment insurance system, corporate pension plan serves as the second largest pillar, and has played a crucial role in history. China needs to act fast to build its corporate pension system for the social endowment insurance system to be more effective. Facing difficulties, understanding the correlations would help companies develop their pension plans. This paper takes the stance of micro companies, and with the considerations of corporate governance, corporate strategy, internal control, risk, tax and financial status, discusses the correlative relations between corporate pensions and company operations in four parts, with consideration of China’s development of corporate pensions, market economy enthronement, and corporate features. The analysis helps companies understand the correlations, which would then help companies make better corporate pension decisions based on their own corporate features and financial status. In turn, it could also assist companies in utilizing and incorporating pension plans when making operational and development decisions. The paper arrives at the following conclusions:First, about corporate pensions v.s. employees’distributions and incentives. The incentive effect of corporate pensions in human resource management can attract talents, increase employee loyalty, improve employer-employee relations, and lower human capital costs. Corporate pensions also help perform corporate social responsibility. According to corporate governance theories, employees and societies are two of the most important stakeholders of a company, therefore corporate pensions improves corporate governance through the effects on employees and societies. Meanwhile, corporate pension plan becomes part of a company’s talent strategy and investment strategy, and serves as an alternative for the human resource inner control. On the other hand, the incentive effect might also have a negative effect on employees, hinder the rational flow of talents among companies, and discourages employees’loyalty with the form of paper contracts. The paper then takes Petro China as an example to elaborate.Second, about corporate pensions and tax preferences. In corporate financing and capital structure decisions, corporate pension plan is considered as tax shield, and could be considered as a substitute for debts; the tax shield is also effective on employees. Five of the tax modes for corporate pensions do not double calculate taxes, and balance the benefits of government, companies, and employees. The EET mode wins the greatest international support. The substitution of debt effect of corporate pensions can partly explain the reason why companies adopt conservative financial leverages.Third, about the financial considerations in company operations. The paper does an empirical study on Bank of China as an example, and looks at the con-elation among corporate pensions and three major financial indicators:profitability, solvency, and liquidity ratios. In practice, pension to asset ratio, net rate of return on total assets, capital adequacy ratio, and liquidity ratio are chosen as variables of the regression. Using the least-squares method of Eviews, the paper concludes that under a5%significant value, the p-values of all variables are above0.05, and thus we can not reject the null hypothesis that there is no significant correlation among the variables. Only the profitability variable is correlated with pension under a10%significant value. Possible explanations of the inability to reject null hypothesis under a5%significant value could be:limited data, the representativeness of the chosen indicators, and the complicity of corporate pension decisions. Based on a future larger corporate pensions data base and more sample companies, further researches are necessary to arrive at more conclusive decisions.Fourth, corporate pension plan brings along the following additional risks:during the investment process which aims at preserving and increasing pension asset value, the company is exposed to interest rate risk, inflation risk, exchange risk, and liquidity risk; there is also the risks of a weaker financial status, corporate credit downgrades, and increasing WACC and equity beta values; credit risks and default risks arising from agency problems; operational risks related to company policies, processes, operators, and IT high techs, which bring pressure to the operational inner control system. The three major problems of China’s corporate pension development aggregate risks that company faces.Given the problematic developing environment for pension funds in China, an understanding of the correlations would help overcome these difficulties, properly adjust pension policies and in turn better companies’operations.