2008 AM Q3.E - pension plan contributions

Hi Brave AFers,

CFAI states that the liquidity requirement for a DB plan = PAYMENTS TO BENEFICIARIES - CONTRIBUTIONS FROM SPONSOR.

My view:

  1. I thought that we should start with PENSION INCOME from the fund and then if is lower than PAYMENTS TO BENEFICIARIES, then yes it is time for the sponsor to get in with CONTRIBUTIONS.

  2. they assume that the plan is not earning any income ??? because they start first with sponsor contributions and leave the rest for a net outflow that will be covered by the fund’s assets. What about the pension income expected?

Can anyone please help me with their view?

many thanks and all the best for everyone

Pension Income is not a concept that they talk about in Level III at all. yes, it was there in Level II, happens when the ARPA > RRPA (Actual Return on Plan Assets > Required Return on Plan Assets) and then the Pension Expense could become a Pension Income step.

In Level III - Liquidity - is what needs to be paid out.

And it is what needs to be immediately paid out less anything received from the sponsor. [and this is so because the portfolio needs to cover that shortfall].

I guess it is also this way because most plans do not have too much by way of being able to generate an income given the current economic situation.

I do not think pension income should be considered at all. Liquidity will depend only on if contributions exceed benefits and fees

If it does , liquidity requirement is 0. If it does not then there is a liquidity requirement and the fund must meet this requirement from investment income.

Pension income is an accounting number that hits the bottom line of the Company. It occurs because the expected return on assets exceeds current service cost and interest cost plus any actuarial gains