Alternative Minimum Cost Method – Definition

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Alternative Minimum Cost Method Definition

The form of measure used by a defined benefit pension plan, ensuring that it has enough funds for future payments to its participants is an alternative minimum cost method. The alternative minimum cost method is a system of funding pension plans that have been approved by ERISA (Employee Retirement Income Security Act). The alternative minimum cost approach is a way of figuring out how much money is needed to finance a pension plan. The name of the method has the term “alternative” in it, but the process is actually the main forbidden way to make those calculations. Generally, these estimates use either the estimated operating cost of the benefits over time or a discount formula for current overall benefits.

A Little More on What is the Alternative Minimum Cost Method

A way of finding out how much money is needed to support a pension scheme is an alternative minimum cost. A bill called the Employee Retirement Income Security Act (ERISA) was passed in 1974 by Congress. It laid down guidelines for the funding of pension plans. One result was that most firms started to use the alternative method of calculation of the minimum costs. In fact, this approach is based on demographic data to determine how to finance individual workers ‘ pension plans. The method consists of two variants and the pension fund will choose which one has the lowest cost. The pension plan chooses the option with the minimum cost from two alternatives. Hence the name “alternative minimum cost method”

Defined-Benefit Plans

A defined benefit pension plan is a type of pension plan in which an employer/sponsor offered a fixed pension contribution, lump sum, or combination of pensions, based on the employee’s salary, service duration and age ratio, rather than on a direct dependence on individual returns on the investment. A retirement benefit program is a form of a pension plan. In the sense that the benefit formula is specified and is understood beforehand, a defined benefits package is said to be “defined.” Moreover, the formula for determining the employer’s and employee’s contributions is specified and known in advance for a “defined contribution retirement saving program,” but the profit to be paid is not known in advance.

Most government and public agencies, as well as many companies historically, have offered defined benefit plans, sometimes to reward employees rather than to increase their pay.

The Employee Retirement Income Security Act of 1974 (ERISA)

This is a US federal tax and labor law that sets minimum standards for private industry pension plans. It contains rules regarding the federal tax effects of transactions related to employee benefit plans. ERISA was enacted to protect the interests of participants in the employee benefit plan and its beneficiaries by:

  • Requiring transparency of the plan, by notifying the beneficiaries of every information relating to the plan
  • Establishing standards of conduct for plan fiduciaries
  • Providing sufficient solutions and access to federal courts.

ERISA does not require employers to draw up pension schemes. Equally, it does not mandate, as a general rule, that programs provide a minimum level of benefits. Rather it governs the operation of a pension plan once it is formed.

Acceptable Actuarial Cost Methods

Organizations have two specific strategic choices for the calculation of the minimum level of funding using the actuarial cost approach based on the less expensive method. The choices include:

Actuarial Cost Method: The pension fee plus return of the investment must equal or exceed the sum paid to pensioners for the purpose of remaining solvent. In order to calculate premiums on this assumption, the pension management company uses an actuarial process.

Accrued Benefits Cost Method:   This approach measures the benefits which an employee receives by participating in a retirement plan each year. By considering the life expectancy of the employee, one then measures the present value of the benefits and applies this value to the year the employee receives those benefits.

The acceptability of the individual actuarial cost methods which are used by organizations to arrive at the requirements of the annual fundings is largely dependent on the Secretary of Treasury of the United States. Terminal cost methods which give room for employers in various organizations to pledge the payment of a lump sum to their employees in order to make up for shortcomings at a later date, or by using “pay-as-you-go method”, are discouraged in current regulations. Measures that produce higher current payment levels are a usual requirement by acceptable methods. Examples of such high current payments level generating measures include individual level premium cost method or the aggregate level cost method.

Reference for ‚ÄúAlternative Minimum Cost Method‚ÄĚ ‚Äļ Retirement Terms & Definitions

Academics research ‚ÄúAlternative Minimum Cost Method‚ÄĚ

Accounting for benefits and costs of urban greenspace, McPherson, E. G. (1992). Accounting for benefits and costs of urban greenspace. Landscape and Urban Planning, 22(1), 41-51. Urban greenspace provides many environmental and social services that contribute to the quality of life in cities. Economic approaches used to estimate value of greenspace services include travel cost, willingness to pay, hedonic pricing and tree valuation. These methods have limited utility for policy-makers, planners, and managers because the underlying values they estimate only indirectly reflect the flow of multiple benefits and costs. A greenspace accounting approach to partially address this deficiency is described using benefit-cost analysis for a proposed tree-planting project in Tucson. AZ. The approach directly connects vegetation structure with the spatial-temporal flow of functional benefits and costs. Prices are assigned to each cost (i.e. planting, pruning, removal, irrigation) and benefit (i.e. cooling energy savings, interception of particulates, stormwater runoff reduction) through direct estimation and implied valuation of benefits as environmental externalities. The approach can be used to evaluate net economic benefits associated with capital investments in urban forests vs. other investments in the urban infrastructure or traditional environmental control technologies.

Optimal short term financing decision, Robichek, A. A., Teichroew, D., & Jones, J. M. (1965). Optimal short term financing decision. Management Science, 12(1), 1-36. The cash requirements of many firms follow a seasonal pattern. These firms may obtain short term cash to cover their seasonal needs from a variety of sources: e.g., lines of credit, delaying of accounts payable, term loans, pledging or factoring receivables, etc. Each of these alternative sources of cash may have different costs as well as special restrictions. Given the set of cash requirements and the costs and constraints relating to alternative sources of cash, it is often difficult to determine the optimum manner of meeting the short-term cash needs. In this paper, this short-term financing problem under certainty is formulated as a mathematical model and solved through the use of a general linear programming routine. Optimum solutions are determined for a number of cases and the general form of the solution is discussed. The paper includes an analysis based on marginal costs and a discussion of the short-term financing problem under uncertainty.


A minimum cost assessment method for composite generation and transmission system expansion planning, Wenyuan, L., & Billinton, R. (1993). A minimum cost assessment method for composite generation and transmission system expansion planning. IEEE Transactions on Power Systems, 8(2), 628-635. Composite generation and transmission system expansion analysis should take into account both economic considerations and adequacy requirements. An optimum expansion plan should achieve the minimum total investment, operation and damage cost. A minimum cost assessment method for composite system expansion planning, which can be used to consider generation expansion and transmission expansion simultaneously, is presented. The minimization model proposed to incorporate both operating and outage costs can recognize different customer damage functions at different load buses and includes the duration of the simulated contingency system states . A computer program based on the presented method has been developed to provide a set of line, load bus, generator bus and system indices which can be used to select optimal expansion plans at different load growth levels. Case studies in which the method is applied to the IEEE Modified Reliability Test System indicate its effectiveness.<>



A global optimisation¬†method¬†for robust affine registration of brain images, Jenkinson, M., & Smith, S. (2001). A global optimisation method for robust affine registration of brain images.¬†Medical image analysis,¬†5(2), 143-156. Registration is an important component of medical¬†image analysis¬†and for analysing large amounts of data it is desirable to have fully automatic¬†registration methods. Many different automatic registration methods have been proposed to date, and almost all share a common mathematical framework ‚ÄĒ one of optimising a cost function. To date little attention has been focused on the¬†optimisation¬†method itself, even though the success of most registration methods¬†hinges¬†on the quality of this optimisation. This paper examines the¬†assumptions underlying¬†the problem of registration for¬†brain images¬†using inter-modal voxel¬†similarity measures. It is demonstrated that the use of¬†local optimisation¬†methods together with the standard multi-resolution approach is¬†not¬†sufficient to reliably find the¬†global minimum. To address this problem, a global optimisation method is proposed that is specifically tailored to this form of registration. A full discussion of all the necessary¬†implementation details¬†is included as this is an¬†important part¬†of any practical method. Furthermore, results are presented for inter-modal, inter-subject registration experiments that show that the proposed method is more reliable at finding the global minimum than several of the currently available registration packages in common usage.


Transmission network planning: A¬†method¬†for synthesis of¬†minimumcost¬†secure networks, Sharifnia, A., & Aashtiani, H. Z. (1985). Transmission network planning: A method for synthesis of minimum-cost secure networks.¬†IEEE Transactions on Power Apparatus and Systems, (8), 2025-2034. A new method is proposed for solving the problem of minimum-cost expansion of power transmission networks. The problem is formulated as a mixed-integer program that explicitly considers both the investment costs of new lines and the operating costs associated with the system. The d.c. load flow equations for the network are embedded in the constraints of the mathematical model to avoid sub-optimal solutions that can arise if the enforcement of such constraints is done in an indirect way. The solution of the model gives the best line additions, and also provides information regarding the optimum generation at each generation point. The security is attained by an iterative procedure using a concept similar to that of the Cutting Plane methods of integer programming. The “Security Cuts’ successively exclude the insecure solutions from the solution space of the problem until the solution obtained by the cost minimizing algorithm is a secure one. The important feature of this procedure is that the added constraints never exclude any secure solutions, thus security is attained without losing optimality. It is shown that the model is applicable to both static and multi-stage planning cases, and an application of the method to a real-world example with 22 right-of-ways is given.

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