First L2 Post - Pension Help!

CFA Level II
#1

I’m sure this is the first post of many but I need some help: All else equal, which of the following satements best descrives the impact of an increase in the expected return on plan assets? Increase in plan assets and decrease in pension expense Decrease in PBO and increase in service cost Increase in net income I don’t understand why A is wrong. My understanding is increase in expected return --> increase in plan assets --> decrease in pension expense --> decrease in net income. As always any help would be much appreciated. Cheers

#2
  • posted same thing three times accidently
#3
#4
#5

mambovipi Wrote: ------------------------------------------------------- > I’m sure this is the first post of many but I need > some help: > > All else equal, which of the following satements > best descrives the impact of an increase in the > expected return on plan assets? > Increase in plan assets and decrease in pension > expense > Decrease in PBO and increase in service cost > Increase in net income > > I don’t understand why A is wrong. My > understanding is increase in expected return --> > increase in plan assets --> decrease in pension > expense --> decrease in net income. > > As always any help would be much appreciated. > > Cheers Increase in net income - Assuming GAAP, any difference between the EXPECTED return and ACTUAL returns are recognized as an Actuarial gain/loss and recognized in “other comprehensive income”… this case will lead to a reduction in amortization expense (if there is one) subsequently reducing pension expense which leads to an increase in net income.

#6

It is the Actual Return on Plan assets - which is different from Expected Return on Plan Assets which will REDUCE Plan Assets - and hence reduce Pension Expense. Expected Return on Plan Assets is only a Actuarial number - and does not “actually” decrease Plan assets number on the Balance sheet.

#7

Hi thanks for your help but I still don’t get it, how about I ask two questions: 1) Will an increase in expected return lead to an increase in plan assets? 2) Will an increase in actual return lead to an increase in plan assets? If the answer to any of those two questions is no then please explain why as I don’t understand.

#8

increase in actual return will increase plan assets. increase in expected return WILL NOT increase plan assets until the Actual Return on the Plan assets is = Expected Return on Plan assets. Plan Assets is what the employer is depositing the funds into (some kind of mutual fund, etc. etc.) and that is supposed to “earn” interest over time to make up for the amount of payouts that are expected to happen. Since the return is uncertain - on that kind of investment - an expected return number is determined for the investment based on its characteristics. The actual return depends on the actual market conditions.

#9

Thanks for that, found the relevant part in Schweser which explained it all and that and your explanation clears it up. Thanks.

#10

Thanks for that, found the relevant part in Schweser which explained it all and that and your explanation clears it up. Thanks.