Expected Plan Asset Return and PBO

Hi,

I have a question on assumption changes for DB plans. When the expected return on plan asset increases, I understand it does not impact the FV of plan asset because it only looks at actual returns but how come it does not impact PBO? PBO includes actuarial gains and losses and this component includes Actual return on plan asset - Expected plan assets * Expected return. Unless the adjustment for actual and expected return only impacts periodic pension costs? Is the definition of actuarial gains and losses different for PBO and periodic expense calculation purposes? Do actuarial gains and losses for PBO calculation only include changes in assumption?

Thank you!

The PBO is based on the liabilities, not on the assets.

Yes but I thought actuarial gains and losses were part of PBO. If actuarial gains and losses are part of PBO and the difference between expected and actual return on plan assets are part of actuarial gains and losses, wouldn’t expected return on plan assets affect the PBO balance? Sorry I may be missing something obvious.

They are.

Again, they are.

It isn’t.

Actuarial gains / losses affect the PBO. The actual return on plan assets affects plan assets, but doesn’t affect the PBO. The expected return on plan assets affects the split of pension costs between pension expense and OCI, but doesn’t affect plan assets, and doesn’t affect the PBO.

It would if you were right about the difference between expected return and actual return on plan assets being part of actuarial gains / losses, but you’re not, and it doesn’t.

Not any longer, I hope.

Thank you!

You’re welcome.

Sorry to reply to this old thread. But I am confused about the statement “It would if you were right about the difference between expected return and actual return on plan assets being part of actuarial gains / losses, but you’re not, and it doesn’t.”

According to the textbook,

Actuarial gains and losses including differences between the actual and expected returns on plan assets.

so my understanding is differences between the actual and expected returns on plan assets impact Actuarial gains and losses . and Actuarial gains and losses impact PBO?

I see why your understanding is what it is. That’s unfortunate, and it’s not your fault.

Under US GAAP, the difference between the actual return on plan assets and the “expected” return on plan assets is considered part of actuarial gains & losses for the purpose of determining what portion of the pension cost goes into OCI, but it is not considered part of actuarial gains & losses for the purpose of determining the pension obligation.

What they really mean is that it’s not part of actuarial gains & losses at all. Cross out the highlighted “including” and replace it with “as well as” or “and also”. The difference between the actual return on plan assets and the expected return on plan assets is not an actuarial gain or loss, but it is treated the same way as actuarial gains and losses in the computation of OCI.

Expected return on plan assets does not affect the pension obligation. Ever. Not under US GAAP, and not under IFRS. Period.

Thank you for the excellent explanation. It’s very helpful!!