Periodic pension cost

CFA Level II
#1

I am having a hard time reaching a clear definition for the periodic pension cost formula. According to the CFAI text , the formula is :

Ending funded status - Employer contributions - Beginning funded status.

and in Schweser notes , the formula is defined as:

employer contributions - (ending funded status - beginning funded status)

and what makes things more complicated is that I was seeking a friend’s help who claims that in Arif’s video , the formula is stated as follows:

ending funded status - beginning funded status + employer contributions

so can anyone help telling me which one is correct and why ?

Thanks

#2

1) = Ending funded status - Employer contributions - Beginning funded status

= (Ending Funded Status - Beginning Funded Status) - Employer Contributions

This is just rearranging the terms.

And this is the same as what Schweser has

2)= employer contributions - (ending funded status - beginning funded status)

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If Ending Funded Status=2000

Beginning Funded Status=1000

Employer Contribs=500

  1. gives (2000-1000) - 500 = 500

  2. gives 500 - (2000-1000) = -500

So the only difference I see there is that one formula gives a number - while the other gives the same number with an opposite sign.

I am not sure about Arif’s formula.

I seem to recall it was Change in Funded Status Less Employer Contributions [which is what both 1) and 2) are doing.]

#3

Thanks for the clarification , but what I still don’t understand is the sign interpretation in both formulas , would the positive sign imply that the company is bearing additional cost and the negative sign mean refunds for example , or the sign has no significance in calculating the periodic pension cost and we should only focus on the absolute value ?

thanks

#4

It has been a while and I don’t want to dig out my books but curriculum formula seems backward: a negative figure would indicate a cost. But then the label they use is “cost”. Kind of idiotic to say pension cost is -$1000 (most people would infer negative cost as an income).

#5

The CFA Curriculum is the source of truth.

Here is an example to make it more clear:

Let’s assume that company A has a completely new Defined Benefit pension plan. In the beginning, the net pension liability equals $0 ($0 plan assets minus $0 obligations).

In the first period, the plan obligation increases by $1000 because of service costs. If the employer makes no contribution to the plan, then the net pension liability would increase to $1000 ($0 plan assets minus $1000 obligations) and the periodic service costs would be exactly equal to that change.

If, however, the employer contributes $1000 to the plan in that period, then the net pension liability would remain at $0 ($1000 plan assets minus $1000 obligations). In this situation, although the change in net pension liability is $0, the periodic pension cost is $1000.

The Total periodic pension cost = (Ending funded status – Beginning funded status) - Employer contributions

#6

^ however, in either of your example, total periodic pension cost = -$1,000. I am saying that it would be more meaningful for it to be total periodic pension cost = $1,000. If you ask accountants, a negative cost will always be perceived as a gain/income.

#7

thank u all for the clarification, just to make sure that I fully understand what u guys said , according to the formula stated in the CFAI text , the sign has no useful interpretation cuz in all cases the result will be a cost, ie; there cant be any gains resulting from this formula, right ?

#8

That is the thing. If the calculation results in a positive number, that cost is truly a gain! This could occur on rare occasion when the actual market return on plan assets exceeds the service and interest cost (or there are significant actuarial gains).

#9

Ok , thank you so much