Hey I just joined the forum and have a question about pension fund accounting. If you have a net pension liability, and then you incorporate an (unrecognized) actuarial gain and (unrecognized) past service cost. What is the rational behind subtracting gains and adding losses and costs. In the problem 8, page 181 of schweser book 2, there is a net pension liability of 85, an unreacognized actuarial gain of 12 and prior service cost of 27. So I initially thought of it as a liability and did: New net pension liability = 85 -12 + 27 (gain reduces, new cost increases) liability. The book shows (85) - 12 + 27…in other words, the actuarial gain increases the liability and the new cost decreases it. I was hoping someone could shed some light on this because its backwards from how i think about it. Thanks. Chris

beg PBO +Service +int +PSC + PBO loss - PBO gain - retiree payouts = PBO when an actuarial estimate is changed, such as when the actuary’s estimate of the life of employee increases, it increases the outflow required by the firm due to the increase outflow, the PBO is now larger than previously expected (creating a “PBO loss”)

sorry i should clarify that more. due to the increase in the required outflows (annual retirement payments) by the firm, the outflows are now even higher than previously estimated. thus, a higher outflow means a loss to the firm —> “PBO loss” PBO loss would then be added to derive the PBO, which is the obligation based on projected salary during final year of service. more intuitively, Annual Retirement Payment increases, increasing the Total retirement lump sum value at retirement, discounted back to the present, giving us the PBO

Hey pacmandefense, Thanks for the prompt response. I know those equations from the books, but how do you define an “actuarial gain”. I thought about it as something that decreased the PBO, and given that plan assets are independent of that, an actuarial gain would decrease the amount of “underfundedness” of the pension liability. Similarly, the increase in service cost would increase the PBO and increase the “underfundedness” of the liability. Is this wrong? Actuarial Gain seemed like decreased outflow.

Think mathematically for this one. You are starting with something that is NEGATIVE. Which is smaller than -85? -97 or -70? Answer: -97. -70 is closer to 0 - so it is the bigger number. As you have pointed out - Actuarial Gain should reduce the underfundedness. So there is only 1 direction to go - that is -97.

cpk123 Wrote: ------------------------------------------------------- > Think mathematically for this one. > > You are starting with something that is NEGATIVE. > > > Which is smaller than -85? > > -97 or -70? > > Answer: -97. > > -70 is closer to 0 - so it is the bigger number. > > As you have pointed out - Actuarial Gain should > reduce the underfundedness. So there is only 1 > direction to go - that is -97. I agree with the logic that BostonBoy laid out, and that CPK mathematically supported - that a cost, 27, that is larger than the gain, 12, should result in an increase of the liability. So, the conclusion is then that the Schweser answer (PBO = (85) - 12 + 27 = -70) is wrong? I would imagine the correction appears in a list of errata somewhere?

Nope the answer is NOT WRONG… What I was trying to say was this. Original Liab=-85 If you took and added the Gain of 12 --> you would end up with -85 + 12 = -73. But this would mean that the Liab increased, instead of Reducing. Reducing is what you would expect with the Gain is added to the existing liability. So it should be -85 -12 = -97. Then you had the prior service cost addition - which would INCREASE the liability. So -97 + 27 = -70. And -70 > -85 you started out with.

cpk123 Wrote: ------------------------------------------------------- > Nope the answer is NOT WRONG… > > What I was trying to say was this. > > Original Liab=-85 > > If you took and added the Gain of 12 --> you would > end up with -85 + 12 = -73. But this would mean > that the Liab increased, instead of Reducing. > Reducing is what you would expect with the Gain is > added to the existing liability. > > So it should be -85 -12 = -97. > > Then you had the prior service cost addition - > which would INCREASE the liability. So -97 + 27 = > -70. And -70 > -85 you started out with. Now you’ve got me really confused. If you start with a liability of 85 and then see a gain of 12, you would expect the liability to be reduced, as you said. So, if I owed 85, and now I owe 12 fewer than I did before, don’t I owe 73? Reducing a liability means owing less money (i.e. a less negative number). Increasing a liability means owing more money (i.e. a more negative number). So the gain reduces the liability making the liability -73. If the liability went from -85 to -97 that would be increasing the liability. Then the prior service cost would increase the liability by 27, making the liability -100? Maybe I’m not understanding the question. Can someone post the actual question? What’s being asked for?

y… go back to your basic mathematics… That’s why I brought up the math part there. -85 + 12 = -73. But -73 is > -85. So you did not have a DECREASE – it was ACTUALLY AN INCREASE if you ADDED 12. You need to SUBTRACT the 12 - and get to -97 TO HAVE THE DECREASE… Please let me know if that makes sense. Otherwise draw the number line on the -ve side and you’ll see that things closer to 0 are higher than things further away from 0 once you go on the -ve side.

cpk123 Wrote: ------------------------------------------------------- > y… go back to your basic mathematics… That’s > why I brought up the math part there. > > -85 + 12 = -73. But -73 is > -85. So you did not > have a DECREASE – it was ACTUALLY AN INCREASE if > you ADDED 12. You need to SUBTRACT the 12 - and > get to -97 TO HAVE THE DECREASE… > > Please let me know if that makes sense. Otherwise > draw the number line on the -ve side and you’ll > see that things closer to 0 are higher than things > further away from 0 once you go on the -ve side. I understand what you’re saying about the basic mathematics and agree that in an absolute number sense -73 is greater than -85 (-73 appears to the right of -85 on a number line). But, a liability of 73 (meaning you owe someone 73) is not greater than a liability of 85 (meaning you owe someone 85). If you owed me $85, wouldn’t your debt to me (your liability) be more than if you owed me $73? Are you using the negative sign to indicate that the 85 is a liability (i.e. a future negative outflow), or are you saying that the magnitude of the liability is -85 (meaning that it’s sort of like an asset - you own someone -85 dollars)? In case of the latter, your math makes sense. However, in case of the latter the firm would have a net pension asset, not a net pension liability as the original questions asserts.

yes 85 is a liability because the original was underfunded. and the magnitude is also 85. The magnitude changes to be a -70 at the end of both the above 12 due to the Gains, 27 due to the prior service cost.

whats the answer, isnt it 100 underfunded? my calculation says -85+12-27 = -100.

it is -70 underfunded… that is the answer.

haha… cp!

Maybe I confused everyone… The question is: What is the net pension liability given then the company’s pension plan is $85 million underfunded. Unrecognized actuarial gains total $12 million and unrecognized prior service cost is $27 million. My logic was (85) + 12 - 27 = (100) Schweser says: (85) - 12 + 27 = (70) After reviewing, I think here is this mistake. Net pension asset or liability is equal to the funded status without adjustments for unrecognized items. So we know (85) underfunded includes the 12 million actuarial gain and 27 million service cost, which are smoothing the pension expense. So the 85 liability includes an actuarial gain (which reduces the liability) and a service cost (which increases it). Therefore, to get to net pension liability we would do: 85+12-27=70 liability. BTW - there is a little example at the bottom of page 170 that shows moving between funded status and net pension line on balance sheet.

BostonBoy Wrote: ------------------------------------------------------- > Maybe I confused everyone… > > The question is: What is the net pension > liability given then the company’s pension plan is > $85 million underfunded. Unrecognized actuarial > gains total $12 million and unrecognized prior > service cost is $27 million. > > My logic was (85) + 12 - 27 = (100) > Schweser says: (85) - 12 + 27 = (70) > > After reviewing, I think here is this mistake. > Net pension asset or liability is equal to the > funded status without adjustments for unrecognized > items. > > So we know (85) underfunded includes the 12 > million actuarial gain and 27 million service > cost, which are smoothing the pension expense. So > the 85 liability includes an actuarial gain (which > reduces the liability) and a service cost (which > increases it). Therefore, to get to net pension > liability we would do: 85+12-27=70 liability. > > BTW - there is a little example at the bottom of > page 170 that shows moving between funded status > and net pension line on balance sheet. Thanks BostonBoy - that’s a much clearer explanation. Makes sense now.

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