Pbo > Fv of plan assets
.
.
We have to be careful there is a difference between unfunded pension plan an underfunded pension plan. an unfunded pension plan is a one where the company itself manage the plan asset hence the benefit paid are coming from the company itself, but an underfunded pension plan is a one where the plan is independently manage and has a PBO higher than the plan asset. it make sense that the benefit paid is a cash outflow for an unfunded plan because it’s just like the company write the check straight to the employees.
Abnitchas it sounds like according to cgot you’re correct, but I still can’t see why in an underfunded plans the benefits wouldn’t be the outfkow
.
The bottom line is that the plain vanilla defined benefit in the CFAI material is NOT an unfunded pension plan but rather the opposite. The only time a company has to write a check is to make a contribution into the plan asset (cash outflow); the plan asset is manage by some asset manager who then pays benefit to employees.
Wow. Seems you are correct, what a tricky f’n question! Very unintuitive. Wasn’t sure about this b/c I remembered about the financing vs. operating cash flow concept, but in the end decided to go with “common sense” (you would think the OUTflow is the money paid OUT)