# Economic pension expense again

Ok, this stuff is making me insane: Schweser= Service cost+ Interest cost- actual return on plan assets. Try this formula on page 107 example of the CFA FRA book and let me know what do you think. Thnaks

im still not sure when to use actual return vs expected return. I’m hopiong i’ll figure it out when i see the question.

There are two ways two calculate Economic Pension Expense: 1. Economic Pension expense = service cost + interest cost - actual return. 2. Change in Funded Status - Employer contribution. As for when to use actual return and expected return, I think you always have to use expected return to calculate Pension Expense on Income Statement else the expense would be too volatile. In contrast, you have to use actual return to calculate PBA. Could anyone confirm this?

expected return is how pension expense is actually calculated for the financials. because its not an actual figure - its a smoothed figure and so u need to adjust to ACTUAL for economic pension expense.

gan1984 Wrote: ------------------------------------------------------- > There are two ways two calculate Economic Pension > Expense: > > 1. Economic Pension expense = service cost + > interest cost - actual return. > > 2. Change in Funded Status - Employer > contribution. > > > As for when to use actual return and expected > return, I think you always have to use expected > return to calculate Pension Expense on Income > Statement else the expense would be too volatile. > In contrast, you have to use actual return to > calculate PBA. Could anyone confirm this? So how do you know which formula to apply? I am sure there will be both answers amongst the choice?

>“There are two ways two calculate Economic Pension Expense: >1. Economic Pension expense = service cost + interest cost - actual return.” - this is wrong: it’s actually Economic Pension expense = service cost + interest cost + plan amendments - actual return so for that example on page 107, it would be: Service Cost 357 + Interest Cost 333 + Plan amendments (-59 +755 - 25) - actual return 241 = 1120 though seriously, why use that method when you can just do The change in PBO 925 Less the change in Plan Assets 1028 Plus employer contributions 1223 = 1120

> So how do you know which formula to apply? I am > sure there will be both answers amongst the > choice? both results will be the same.

Hint: economic P.E. is same as normal P.E., except for making “economic” changes: 1) We don’t believe in expected stuff, only ACTUAL return. 2) Don’t deduct amortizations of large plan changes just to show a small P.E… that’s almost like cheating (but U.S. GAAP allows for it). Deduct the real thing, the ACTUAL cost of those those changes.