Pension Expense vs Economic Expense

CFA Level II
#1

Economic expense = Change in funded status - employer contributions.

With that in mind, if there was a poor performance in the fund and there were some acturial losses I would have thought that would increase the economic expense (perhaps this is correct).

However, one of the questions from 2011 mock states that a poor performance in the pension doesn’t have an effect on pension expense.

What’s the difference between pension expense and economic expense?

thanks. P

#2

Actual vs Expected returns.

#3

Pension standards were different then. Forget the 2011 material.

#4

Again,

(1) ACCOUNTING pension expense = Service cost + Interest cost - EXPECTED pension expense

(2) ECONOMIC pension expense = Service cost + Interest cost - ACTUAL pension expense

Meaning,

  • if actual plan asset return pluges, economic pension expense increase

  • if actuarial losses incurred = expected plan asset return (for example) is adjusted downward, acounting pension expense increase

  • Therefore, a poor performance in the pension (fund) doesn’t have an effect on (accounting) pension expense (in the short term)

#5

QFT