Final answer:
Increasing the expected rate of return on pension plan assets may decrease annual pension expense because it allows the pension fund investments to grow faster, reducing the need for current contributions. Defined benefits plans provide a fixed income, and firms are penalized for underfunding these pension plans, emphasizing the importance of adequate fund management.
Step-by-step explanation:
The question explores factors that may decrease the annual pension expense amount for a company. Specifically, increasing the expected rate of return on pension plan assets can lead to a decrease in pension expense. This is because a higher rate of return means that the company can expect its pension fund investments to grow faster, thus requiring less contribution in the present to meet future obligations.
Defined benefits plans are set to provide a fixed nominal dollar amount per year upon retirement. Therefore, firms need to manage their pension funding carefully. Legislation that penalizes firms for underfunding their pension plans encourages maintaining sufficient funds within pension accounts to secure retirement benefits.
Furthermore, retirees who rely on these fixed pension benefits may face a decrease in purchasing power due to inflation over time. Hence, accurate pension planning and management are crucial to ensure that retirement benefits remain adequate for retirees' future needs.