CFA Level 2 MOCK Afternoon

CFA Level II
#1

Can any one expanin me why the Employee contribution has added while calculating Benefits Paid…

Rowland now turns his attention to the information provided about the company pension plan. Increasing pension costs have been a concern for several years. The increasing pension costs combined with the impact on pension assets from poor investment performance had resulted in a funding deficit in the plan during 2014. In an attempt to better control pension costs Austell had made the following changes to the plan over the past two years:

 During 2013 the company had changed the early retirement benefits for members who joined the plan before 2000.

 During 2014 Austell capped the salary increases that were eligible for pensionable benefits to 1%.

These changes were reported as plan amendments in the year made. Information concerning the company’s pension plan as of December 31, 2014 is shown in Exhibit 4. Rowland wanted to review the pension expense, cash flows and the plan’s funding position. He was also aware that accounting policies allowed for some pension related costs to be smoothed and was concerned about whether the poor fund performance was appropriately reflected in the amounts recorded for the year.

Exhibit 4

Austell Pension Plan Information

Values in £ Millions

December 31, 2014

2014

2013

Employer contributions

74

89.0

Employee contributions

1.5

1.0

Current service cost

57.4

85.0

Plan amendments

(189.0)

(78.4)

Actuarial gain

274.7

817.0

Plan assets at start of year

4,038.00

4,182.00

Plan assets at end of year

3,307.50

4,038.00

Benefit obligation at start of year

3,651.20

4,408.60

Benefit obligation at end of year

3,432.30

3,651.20

Actual return on plan assets

-18.6%

-1.4%

Expected return on plan assets

7.2%

6.6%

Discount rate used to estimate plan liabilities

6.6%

  1. The benefits paid (in millions) from Austell’s pension plan in 2014 is closest to:

A. £74.0.

B. £55.0.

C. £53.5.

Answer = B

Benefits paid can be determined either from focusing on the change in pension plan assets or from the change in the benefit obligation over the year, as follows:

(£ millions)

Calculations

From the change in plan assets:

Assets at start of year

£4,038.0

Actual return on assets

–751.0

–18.6% × 4,038.0

Employer contributions

74

Employee contributions

1.5

Benefits paid

–X

To be solved for

Asset at end of year

£3,307.5

Solve for X: £55.0

#2

CFA MOCK AFTERNOON QUE.28

#3

Can any one explain me why the Employee contribution has added while calculating Benefits Paid……

#4

I’m trying to figure this out myself. In my mind, only the pension assets should be affected. Unless however, Austell is netting the amount due to the employee against the amount the employee contributed? Thoughts on this?

#5

It is 4038-751+74+1.5-x=3307.5. Solve for x, it is 55.

Logically speaking, opening asset + (return on assets) + contributions - Benefits paid = Asset Closing balance

#6

All contributions is cash coming in during the year, hence add it to the asset

#7

Well, let’s illustrate the whole process:

At the beggining of the year you have Beg. Pension Assets. It is obvious that at the end of the year you will have Ending Pension Assets, which will be different from Beg. Pension Assets. Why?

Because things can happen during the year:

Assets generate a return (+ Actual return on Beg. Pension Assets)

Employer puts more money in the Pension Assets (+ Employer contributions)

Employees also want to contribute to their retirement and put money (+ Employee contributions)

But, unfortunately the CFO has retired this year so the company makes a huge payment (- Benefits Paid)

And if you sum all these concepts, you get Ending Pension Assets through a very logical process.

Regarding Empoyee contributions, the way I see it is that if the employees give you the money so you keep it until retirement, you mix it up with the contributions you make as employer, and the employees have a right to recover it in the future so it does not matter who made it! It’s just added to the Pension Asset.

Cheers

#8

Thanks Sharky7

Good Explanation…

#9

It seems to me the question is purposefully misleading, as it should state net benefits paid instead.

#10

Yes…U r right…

#11

The thing is that at the last qn,

From an economic perspective, in 2014, the most appropriate interpretation of Austell’s contribution to the pension plan relative to its total pension cost (excluding income tax effects, in £-millions) results in a(n):

employee’s contributions were not considered.

#12

I think this item set is not well written, it’s no longer on CFAI.

#13

Thanks for replying a 3 year old thread.