Economic Pension Expense

How is economics pension expense defined, Economic pension expense = service cost + interest cost – actual return on plan assets + plan ammendments or Economic pension expense = change in net funded status + exployer contribution or they are the same thing? Thanks.

Economic pension expense = change in net funded status - exployer contribution Subtract , do not add employer contributions. They are the same thing , only two different ways to get to the same number

They are the same thing. Your formulas are correct. @janakisri Employer contributions are added. See V2 Reading 22 Pg 116

hmm… anyone know why employer contribution are added? Wouldn’t employer contribution decrease the expense?

Schweser Book 2 Page 56 has a clear example , unlike the CFAI example you mention. +Change in Funded status - ( i.e. remove) Contributions ------ = Economic pension expense. To me it makes ( economic?) sense to remove contributions then look at the true picture of what remains as economic expense

because the it costs the money company to put cash into the plan. The plan is a seperate legal entity by the way.

There are two ways to calculate economic pension expense, Change in Funded status - Employer contributions OR Change in PBO (excluding Benefits Paid) - Actual Return on Plan Assets

its Contribution less change in funded status but if we are using the other formular the last bit we should use ammendmends for the current period

AudreyMwala Wrote: ------------------------------------------------------- > its Contribution less change in funded status > This is the right way of saying it. Beg value of Plan assets - Ending value of plan assets - (Beg Benefit obligation - Ending benefit obligations) + Employer contributions.

CFA text V2 Pg 119: Change in funded status = end year balance - beg year balance = 1250 - 748 = +502 change during the year Contributions during year = 59 contributions - change funded status = 59 - 502 = -433 economic pension expense since this is a negative, it is actually income (not expense) as the actual return on plan assets was higher than the increase in benefit expenses (their investments outpaced their expense, thus income)

sorry. Costs the company money. Not the money company.

Perfect. Thanks all. I have one more question: Economic pension expense = service cost + interest cost – actual return on plan assets + plan ammendments how does reported pension expense differ from Economic pension expense? reported pension expense = service cost + interest cost – expected return on plan assets + plan ammendments ?

Economic PE is the same as change to PBO + actual return on plan assets (and excluding benefits paid) Pension Expense are Economic Expense are very different - dont confuse them! PE uses expected returns and amortization = does not reflect reality due to ‘smoothing’ Economic PE uses actual returns, current service cost, and current portion of PSC and actuarial G/L = does reflect reality

I would be careful with the change in the PBO formula. Schweser conflicts with the CFAI Mock

Chen, first: expected Return on Assets vs. Actual ROA second, i think, is that in reported pension expense, its the amortization of PAST plan amendments. Economice PE is amendments in the current period and its the whole loss (or gain). It is not amortized

also, i wouldn’t use that formula. CFAI text has more items than does stalla (Discontinued ops, currency translation effects) that need to be accounted for to come up with ecomomic expense. Basically, its every item that increases the obligation besides benefits paid and contributions less actual roa.

thanks. was curious what else was smoothing besides swapping in ROPA for eROPA.