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%
- 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