I was just going over pensions, and got tripped up on some definitions. I listed a couple, but could somebody please help with two definitions: ----------------------------------------------------- Pension expense on the income statement: service cost + interest cost – expected return on plan assets +/- recognized past service cost +/- recognized net actual loss Economic pension expense: employer contribution – (change in funding) Excess contribution: employer contribution – economic pension expense Actual return on plan assets: (expected return on plan assets + actuarial gain) Employer contribution: ??? I can’t figure it out Service cost ??? I can’t figure it out
I think both have to be given, as they are derived after performing actuarial valuations. (Unless they give you a REALLY simple example with an exact number of years payable after retirement etc.) Do others agree with me?
I hope you are right, b/c I can’t seem to figure out employer contribution service cost
you could possibly have to do it. SC is just the present value of the annuity you will receive after retirement (the amount that was actually earned in that year). If each year you earn 1% of your final year salary (assume 100,000 in final year), you will receive 1,000 per year after retirement (they will have to give you expected life after retirement…). it is just the present value of those cash flows at the end of the current year. The interest cost is the increase due to the passage of time. So, it is the PBO at the beginning of the year multipled by the discount rate. The above is likely oversimplified, but I doubt they would ask for much more. Feel free to disagree.
Employer contribution is what employers contribute to the plan each year. Service cost is the present value attributed to the employee for service performed in the current year
pension expense could have some other items. look at first example in cfa text. it has currency translation gain/loss and something else. i think a better way to think of PE is to sum every item that makes DBO go up/down with the exception of items they let you amortize (e.g. actuarial gain/loss, past service cost, difference between actual and expected roa)
I dont really get when we will be using the following formula in a straightforward way Pension expense on the income statement: service cost + interest cost – expected return on plan assets +/- recognized past service cost +/- recognized net actual loss Either “+/- recognized past service cost +/- recognized net actual loss” will be amortised or they will be deferred totally. So does it mean we will never be required to simply plug in the numbers?
employer contribution is simply just the payroll multiplied by the employer contribution rate in most cases. current service cost is the pv of the benefit earned for working 1 more year = annuity factor x one year accrued benefit. That accrued benefit will depend on the benefit formula e.g ( final salary plan formula can be ( years of service x final three years average salary x 2%) so the current service cost would be (annuity factor x 2% x final three years average salary x 1) I think though for the purpose of this course both the csc and er conts are always given. Theye are testing if you can apply and interpret them not whether you know how to calculate them
jeffsick Wrote: ------------------------------------------------------- > > current service cost is the pv of the benefit > earned for working 1 more year = annuity factor x > one year accrued benefit. isn’t it for working one more reporting period, not necessarily 1 year? probably 1 quarter since companies report quarterly
i can pretty much guarantee that the service cost will be provided in the question. i will personally paypal you $5 if thats not the case. basically, the SC is the cost of having everyone in the plan accrue 1 new year of service toward the benefit at retirement. however, its not just the pv of the annuity. there is alot of discounting for probability of death, people quitting before vesting, etc. actuaries calculate this using a whole big bunch of assumptions and software. they will give you the sc in the question, no doubt about it.
well, i work for an actuarial firm and calculate it everyday, it is just the pv of an annuity. I will agree that the annuity depends on age, interest rates, age of spouse, mortality etc but it is still an annuity
> Pension expense on the income statement: service cost + interest cost – expected return on plan assets +/- recognized past service cost +/- recognized net actual loss Change that to: Pension expense on the income statement: service cost + interest cost – expected return on plan assets +/- recognized past service benefit/cost +/- recognized net actuarial loss/Gain
jeff. its not just the pv of the accrued 1 yr’s benefit is what im saying. my point is if I work 1 more year for my firm, i am technically accruing 1 yr’s credit toward pension plan. the sc is not however *just* the pv of that extra year’s accrual. its the pv of the accrual discounted for the prob. of quitting, dying, etc. so no, u dont just take the pv of 1 extra year of service. and no, you wont have to calculate it on the exam
zoya we r saying the same thing That annuity factor is not just an annuity from level 1, the annuity factor takes into mortality( via the mortality table used) If the pension plan has in a turn over assumption I agree that you must take into account prob of terminating.
Na na. Mark the pbo in () and the fv as a positive. Calc the diff between than and mark down as change. It’s either + or - trend. EIther way subtract emp contibitions ad realize the expense should be a negative number. Can’t go wrong