Example 7 shows the calculation of Economic Benefit Expense. It shows how to calculate the Actual Expense and Actual Return on Plan Assets to arrive at the Net Economic Benefit Expense. In the example, Plan Amendments and Currency Translation effects are included. In Problem 11, we are asked to calculate the Actual Return on Plan Assets. In that calculation, Curtailments, Settlements, and Currency Translations are not included as they were in the calculation for Plan Assets in Example 7. Am I doing something wrong? I thought that Economic Benefit Expense (and its parts) should include everything except benefits and contributions. Thanks.
I’ve posted this before, and now I’ll post it again: “I wouldn’t worry too much about the first way, it’s long and messy. Just remember this: Economic Pension Expense = Employer Contributions - change in funded status if someone other than the employer contributes to the plan as well, ignore that and do NOT include it in the calculation. Also remember this: change in funded status = (Fund Assetsend - DBOend) - (Fund Assetsbeg - DBObeg) and that’s all you need to know about that.” If you can’t solve the problem with this formula, post again and i’ll have another look at the problem.
I read the previous post. You are correct wrt Net Economic Expense but Problem 11 is not asking for the total benefit change. The problem dissects Net Economic Expense into the Expense and Asset portion so you cannot use that formula. The problem requires you to understand the components of Net Economic Expense: economic expense and asset return. Pls take a look at the example and the problem and let me know if I am wrong.
alrighty, will do when I get home, which will be in like 2 and a half hours. I did all the EOC for this reading a while ago, and I don’t remember any one problem giving me too much trouble, so I feel like I should be able to come up with somethin for ya.
for now, I have this from my notes: Actual Return on Plan Assets = Expected Return on P.A. + Actuarial Gains
The thing to remember is that return on plan assets just basically means investment returns on their portfolio. They have estimated an expected return, and the real return exceeded the expected return, so they add that to the expected return.
Hello dood, I just looked at it, and it’s just the formula I said: Actual return on plan assets = Expected return on P.A. + Actuarial gain on P.A. = 3455 + 784 = 4239 BAM! done. don’t think about it too much, just remember the formula for the exam.
Did you look at Example 7 to see how it was calculated there?
Yeah, I looked at it just now, but neither of the two questions in the example are asking for Actual Return on Plan Assets; 1. pretty much asks you to find economic benefit, and shows the stupid long way of solving for it 2. asks you to adjust net income to reflect the economic benefit expense. no problem. I remember reading through that longass example for #1, and then just said “meh” and solved for Economic Benefit Expense this way: 1. Economic Pension Expense = Employer Contributions - change in funded status employer contributions = 59 change in funded status = ? = need to solve for it change in funded status = (Fund Assetsend - DBOend) - (Fund Assetsbeg - DBObeg) = [18355 - 17105] - [17515 - 16767] = 502 therefore, Ec Pens Exp = 59 - 502 = -443 2. Net income = $6540 tax rate = 12.6% reported benefit expense = 186 the economic “should be” benefit expense = -443 So they reported an expense of 186 for their pension benefit, and that figure would have been subtracted from the before tax income. The Economic Benefit Expense suggests that the realistic figure for that should have been a pension benefit expense of -443 (or rather a gain of 443). So you just adjust net income accordingly; to reflect an income of 443 before tax, rather than the expense of 186 which was factored in. Pretty much, this means adding the following to net income: = new income figure - old income figure = 443 - (-186) = 549.746 isn’t that easier?
Thank you so much for your replies. Looks like you know your stuff and I’m sure you will do well on the exam. I will follow your advice and remember that formula for the Net Economic Benefit Expense for the exam. However, even though Example 7 didn’t explicitly ask us for the Actual Return on Assets, it was part of the long calculation to arrive at Net Expense. So if you use Actual Return on Plan Assets = Expected Return on P.A. + Actuarial Gains in Example 7 to calculate Actual Return on Assets, you will not get the same Actual Return given in Example 7. 804 + 4 vs 1661 So, if the formula is correct, it should apply in all cases. Am I doing something wrong?
I see your point now about the way they calculated Actual Plan Assets tho; they needed to find it as an intermediary step in their long calculation for Economic Benefit Expense. With my formula, I would have just put 808 as the value for Actual Returns (were I asked for it). again, my formula was: Actual Return on Plan Assets = Expected Return on P.A. + Actuarial Gains =804 + 4 = 808 clearly, this is missing some stuff based on this example. The other two item sets that are laid out this way in the EOCs don’t have any of the other stuff, and my formula works just fine for finding Actual Return on Plan Assets. However, come exam time, I agree it might be possible that they throw in some of that other stuff, which would bone me in my use of the overly simplified formula. So from what it looks like in that example, and sort of also in the problems, the full(er) formula for Actual return on Plan Assets seems to be: Actual return on PA= Expected return on PA + Actuarial Gains + currency translation effects + plan amendments - plan assets related to discontinued ops Other than Expected return on PA which is obviously gonna be in there, the only other item that showed up in under the “Change in Plan Assets” heading was Actuarial gains, so this formula and mine both lead to the same answer. I’ve modified this formula in my notes to reflect these other items, but I feel like they won’t show up. Better safe than sorry tho, I guess. Thanks for pointing this out!
Ok, now with your new formula, try to solve Problem 11. It should look like this: 3455 + 784 + 216 + 15 = 4470 = Actual Return on Plan Assets BUT from the solutions we see that your simple formula is the right way to go: 3455 + 784 = 4239 = Actual Return on Plan Assets So, again, which method do we use? Either I am missing something conceptually or CFA messed up here. P.S. Before asking this question, I googled “pension expense site:analystforum.com” and came across an old posting mentioning that Schweser makes this same mistake by not including currency and forex adjustments so one will likely get this wrong on the actual exam.
yeah… I’ve rethought the whole thing, and here’s what I think. In the solution to the problem, it says the formula for actual return on plan assets is Actual Return on Plan Assets = Expected Return on P.A. + Actuarial Gains so I’ve decided that’s what I’m going to go with on the exam. It would be dickish of them to make both answers available on the exam as multiple choice. I’d stick with this one since it’s spelled out explicitly in the solution, rather than as an appendix of some poorly worded example in the middle of the chapter somewhere. if this simple formula is not in an answer choice, I’ll try the other and hope it works out (and hope I can remember the items!) but I’m pretty sure you’ll be safe with this simple formula.