PLEASE HELP OUT - ARE EMPLOYER CONTRIBUTION AND EMPLOYEE CONTRIBUTION INCLUDED IN PENSION ACCOUNTING EQUATION?

CFA Level II FRA
#1

beginning PBO + current service cost + interest expense + past service cost +/- actuarial loss/gain - benefit paid + employee contribution = ending PBO

beginning FV of plan assets + actual return - benefit paid employer contribution + employer contribution + employee contribution = ending FV of plan assets

UPDATE:

AS PER CFAI ONLINE PRACTICE QUESTION FR&A Q.52 ITEM SET “Austell Industries Case Scenario”, EMPLOYER CONTRIBUTION AND EMPLOYEE CONTRIBUTION ARE INCLUDED IN THESE FORMULAS. SEE SOLUTION BELOW

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

  1. £55.0.
  2. £53.5.
  3. £74.0.
    Solution

A is correct. 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 Alternatively, from the change in the benefit obligation: Benefit obligation at start of year £3,651.2 Current service cost 57.4 Plan amendments –189.0 Interest cost 240.9 6.6% × 3,651.2 Employee contributions 1.5 Benefits paid –X To be solved for Actuarial gain –274.7 Benefit obligation at end of year £3,432.3 Solve for X: £55.0

B is incorrect because it ignores the employee contributions: 55.0 – 1.5 = 53.5 (using either assets or liabilities).

C is incorrect because this is just the employer contribution of 74.

#2

First quation: Employee contribution does not count towards PBO. PBO measures the obligation of the company, not of the employees. So it should be:

beginning PBO + current service cost + interest expense + past service cost +/- actuarial loss/gain - benefit paid = ending PBO

Second equation: Same problem. Plan assets are put in place by the employer to satisfy the PBO. Employee contribution does not come into play here. The equation should be:

beginning FV of plan assets + actual return - benefit paid employer contribution + employer contribution = ending FV of plan assets

#3

Could anyone else take a look please?

#4

An additional question:

Why would you only add employer contribution in the second equation and exclude on the first?

Employer contribution would help the funded status of the pension.

#5

The employer contributes to the plan by putting assets aside that pay for the pension obligation later. The pension obligation goes down when the benefit is actually paid, not when the assets are put aside by the employer. So while employer contribution helps the funded status (by increasing plan assets) it does nothing to decrease PBO.