Formula screw up in Pensions...

CFA Level II
#1

I have done 2 seperate EOC for Pensions and both require the use of a formula/concept but it doesnt seem to make sense.

Total PPC = End Fund Status - Beg. Fund Status - Contrubutions

Total PPC = End Fund Status - Beg Fund Status + Contributions

IS IT PLUS OR MINUS CONTRIBUTIONS???

#2

Total PPC = End Fund Status - Beg Fund Status + Contributions

#3

thanks quest… EOC question # 7 has it so that you need to subtract contributions… u see that?

#4

I dont have my books with me at the moment but I can only see that it can be plus

minus would not make sense

#5

Isn’t it TPPC = Contributions - (End Fund Status - Beg Fund Status) ??

which is the same thing as multiplying End Fund Status - Beg. Fund Status - Contrubutions by -1

example… contributions 4 End Fund Status = -10 Beg Fund Status = -5

TPPC= 4 - (-10 - -5) = 4 - (-5) = 9

or

TPPC = -10 - (-5) - 4 = -9

#6

You need to add Employer Contributions to exclude its effect on periodic cost, thereby increasing PPC (because this is a cost to the employer, regardless of change in funded status).

In this example, CFAI is representing a cost as a negative number, so subtracting a positive has the affect of increasing your PPC, which is ultimately what you want to reflect.

The text is a bit confusing, but understanding the concept above is the important part, then you can apply the formula and numbers as appropriate.

#7

Im sticking to the + Contributions

#8

Ya the tricky part comes from the funded status. If the plan because more funded (IE change in funded status increases) then your TPPC will decrease. If your plan becomes less funded (IE change in funded status decreases) your TPPC will increase.

If you understand what TPPC is then all you need to remember is the two parts - Contributions and Funded Status and how the affect TPPC, dont even think about the formula. Thats how I approach all material in the CFA if you need to “memorize” the formula, study it unitl you dont.

#9

I made a thread on this about a month ago. Just need to think about it intuitively.

#10

Think of it this way: if the value of your pension assets and pension liability don’t change (perhaps you gave your workers the year off, and earned nothing on the assets), and you contributed $10, then your cost is $10: add the contribution.

1 Like
#11

Smart approach! Thanks.

#12

I can tell you that this is incorrect: Total PPC = End Fund Status - Beg Fund Status + Contributions

If Beginning Funded Status was -$3000

End Funded Status went to - $3020

And Contributions were $1000

Your formula would read TPPC = -3020 - (-3000) + 1000 = 980

the correct answer would be TPPC = 1000 - (-3020 - -3000) = 1020…

This example is from CFAI EOC #9 page 213… solution is on page 217 and reads as follows…

“9 B is correct. The total periodic pension cost is the change in the net pension liability adjusted for the employer’s contribution into the plan. The net pension liability increased from 3,000 to 3,020, and the employer’s contribution was 1,000. The total periodic pension cost is 1,020.” (Institute 217) Institute, CFA. CFA Institute Level II 2014 Volume 2 Financial Reporting and Analysis. John Wiley & Sons P&T, 2013-07-12. VitalBook file. CFAI’s description of the formula can be found on page 198…

#13

As the oracle John Harris would tell you:

Watch your signs!

The formula is employer contributions minus the change in funded status:

1000 - (-3020 minus -3000) = 1020 from the above example

#14

It depends on how you represent a “cost”, i.e. as a positive or negative, that’s all that’s going on here.

So:

$3020-$3000+$1000 = $1020

or

-$3020-(-$3000)-$1000 = -$1020

Generally one would say something costs $1020, not that something costs negative $1020

#15

And that’s probably where the confusion on this thread is stemming from… It’s easiest for me to remember TPPC = Contributions - (Change in funded status)

where: Contributions is entered as a positive number.

To each their own… I was probably in the wrong by claiming his formula was incorrect without knowing how he input the signs on each number… my bad

#16

You’re welcome.

#17

So, to summarize:

We treat PPC as a negative number if the result is positive (since it increases net pension liability) and vice versa: we treat PPC as a positive number if the result is negative (since it decreases net pension liability).

And the result stems from the following formula: Contributions - (End FS - Begin FS)

Case in point: Reading 20, EOC #6 (pg 212)

Is my interpretation anywhere near being correct?