Is actuarial gain or loss (on PBO) the same thing as the amortization of prior service costs (on pension expense)? It seems that both resuls from the amortization of a change in plan ammendments.
This is off the top of my head, but I believe the actuarial gain or loss is the difference between the expected returns and actual returns based on actuarial assumptions for prior periods. If the amount of this difference is greater than 10% of the greater of PBO for FMVPA, then it is amortized (I believe).
You are inccorrect. If the difference between expected and actual returns is mroe than 10% of PBO or FMVPA, then that number is “unrecognized gains/losses” (part of pension expense). If actuaries make plan ammendments, these go into PBO as the actuarial gains or losses (also referred to as just “plan ammendments” in schweser notes). But in pension expense there’s also a component called “amortization of prior service costs”. This to me looks the same as the actuarial gains or losses that are in PBO.
the show NY Wrote: ------------------------------------------------------- > You are inccorrect. If the difference between > expected and actual returns is mroe than 10% of > PBO or FMVPA, then that number is “unrecognized > gains/losses” (part of pension expense). > > > If actuaries make plan ammendments, these go into > PBO as the actuarial gains or losses (also > referred to as just “plan ammendments” in schweser > notes). > > But in pension expense there’s also a component > called “amortization of prior service costs”. > This to me looks the same as the actuarial gains > or losses that are in PBO. Thanks for the clarification, the amortization of prior service costs is the difference between the PBO before the plan amendment and after the plan amendment.
So a plan ammendment is made. The difference before and after the plan is say 100. 100 is 11% greater than PBO, so it must be amortized. So if there are 5 years on the plan, 20 a year goes into “amortized prior service cost” under pension expense. Is that correct? If so, how do you then relate this numeber to the actuarial gains and losses in the PBO? Is the actuarial gains and losses the 100 (i.e. the full amount of the plan ammendment change?
the show NY Wrote: ------------------------------------------------------- > So a plan ammendment is made. The difference > before and after the plan is say 100. 100 is 11% > greater than PBO, so it must be amortized. So if > there are 5 years on the plan, 20 a year goes into > “amortized prior service cost” under pension > expense. > > Is that correct? > > If so, how do you then relate this numeber to the > actuarial gains and losses in the PBO? Is the > actuarial gains and losses the 100 (i.e. the full > amount of the plan ammendment change? I’ll use the example provided in my book, the 10% rule does not apply to prior service costs. These 2 items are completely separate. Let’s say a company had a pension plan for 10 years. The plan calls for the company’s employees to receive 50% of their last year’s salary into retirement. Now, it is amended so that 60% of the last year’s salary will be received in retirement. This 10% difference has to be retroactively applied to the previous 10 years. Going forward, this difference will be amortized into pension expense for the remaining lives of the affected employees.
ok got that. so how is that amortization each yr due to the change from 60% to 50% difference from the “actuarial gains and losses” item in pbo?. in schweser actuarial gains and losses is referred to as plan ammendments which seems to be the same as amortization of prio service costs.
The amortization of actuarial gains and losses occur due to: 1. The difference between the actual and expected return on plan assets (where the 10% rule applies). 2. Changes in actuarial assumptions (compensation growth rates, mortality rates, etc.) The plan amendment example I posted above wouldn’t affect the “Actuarial gains and losses” line.
Also…adding onto what bpdulog said, when the PBO decreases due to a change in the actuarial assumptions, this is referred to as an “actuarial gain”. When the actuarial assumptions change and cause the PBO to increase, this is referred to as an “actuarial loss”. I hope this helps clarify even further.
bpdulog Wrote: ------------------------------------------------------- > The amortization of actuarial gains and losses > occur due to: > > 1. The difference between the actual and expected > return on plan assets (where the 10% rule > applies). > 2. Changes in actuarial assumptions (compensation > growth rates, mortality rates, etc.) > > The plan amendment example I posted above wouldn’t > affect the “Actuarial gains and losses” line. thanks for your contuined help. ok for your point 1 above: that difference between actual and expected is what makes up the amortization of unrecognized gains and losses in the pension expense, isnt it? so the amortization of this difference (if +10%) goes in both pension expense as amortization of gains and losses AND into pbo as a component of actuarial gains and losses? also, in regards to the plan ammendment example you posted, you say that it wouldnt affect the actuarial gains and losses line and instead goes into pension expense under the unrecognized prior service cost. but look at book 2 pg 169. schweser has a line in pbo called plan ammendments. does the plan ammendments (from your example) go here? if not, then what does go here?
I think the “plan amendments” line refers to prior service cost. A separate line in the reconciliation of the PBO would be actuarial gains. I think there are three categories of “deferred expenses” that can get amortized and evenutally flow through the income statement: 1. changes in the plan terms, as in the example above if the % of final salary gets changed, or the sensitivity to years of service. These will be amortized over the average time of plan beneficiaries until retirement, and the amortization will go into “prior service costs” 2. changes to actuarial assumptions (income growth rate, discount rate, mortality,…) These should also be amortized over average time until retirement (I think?) 3. difference between actual and expected returns on plan assets, if they deviate by more than 10% from greater of PBO or fair value of plan assets. These also get amortized (smoothed over time), although I’m not sure over what horizon. This should start popping up in a lot of financial statements thanks to the markets this past year. All of these effects initially get dumped into other comprehensive income (where they hook up with the cumulative translation adjustment under all-current method) until they flow to income statement and are reversed out of OCI. Am I missing any deferred pension expenses??
When they do get amortized, is it straight line over the time until retirement, or until they die? In other words, when you reverse the gains/losses out of comprehensive income, if the’re expected to retire in 20 years but will live 20 years after that, do you amortize over 20 years or over 40 years?
Amortize over average life until retirement. So it would be 20 yrs. in that case. I think the idea is that you want the aggregate pension expenses to balance with economic reality by the time they retire. If they die earlier than you forecast, I’m not sure how that’s adjusted… I would guess it gets recognized immediately tho- in any case, not important for 6/6.