This is another Schweser special. I can’t remember reading anything about termination liability and I thought expected return is based on market related value which wasn’t given in the question. I am beat by this question, if anyone can pls shed some light (including workings)…Apologies for the poor formatting of the table. [TABLE] Millions Dec 31/2007/2006 PBO/635/510 Service cost/37/33 ABO/570/460 Actual return/37/32 Amort transition assets/(1)/(1) Fair value/395/327 Discount rate/5.5%/6.0% Expected return rate/7.5%/7.8% Rate of compensation increase/4.0%/4.0% [Question] What is the expected return on assets and the liability owed if the pension plan was terminated at the end of 2007? Expected return/Termination liability in millions A 25/27 B 30/39 C 25/39 D 30/27
expected is fair value 395 x expected return 0.075 = 29.625, i like 30 on this half liability eek. if i took service cost plus interest cost minus actual return and minus the amortized transition asset i get to a 27 number… but hell if i think that’s even close to right. i would think liability at the end would be something like PBO - fair value, but that clearly is not a choice here. so i’ll do with D. feel semi-ok about the 30 part, just lobbing one out there for the 2nd part b/c i have no idea.
Addendum Just found the errata for this question from schweser: Pls amend the question answers choices as follows: A 25/635 B 30/635 C 25/570 D 30/570 Apologies to all. And esp to bannisja who was an early answerer to the q. wongie Wrote: ------------------------------------------------------- > This is another Schweser special. I can’t remember > reading anything about termination liability and I > thought expected return is based on market related > value which wasn’t given in the question. I am > beat by this question, if anyone can pls shed some > light (including workings)…Apologies for the > poor formatting of the table. > > > Millions Dec 31/2007/2006 > > PBO/635/510 > Service cost/37/33 > ABO/570/460 > Actual return/37/32 > Amort transition assets/(1)/(1) > Fair value/395/327 > Discount rate/5.5%/6.0% > Expected return rate/7.5%/7.8% > Rate of compensation increase/4.0%/4.0% > > > What is the expected return on assets and the > liability owed if the pension plan was terminated > at the end of 2007? > > Expected return/Termination liability > in millions > > A 25/27 > B 30/39 > C 25/39 > D 30/27
ooh that’s tricky. i want to lean to PBO on most of the pension calcs out there, but then again, if you terminate the plan, do you have to calculate all of the future stuff or just the ABO that’s accumulated already since you’re canning the program? i really should open the books and check myself, but better if you just tell me. ABO or PBO if you nix the program? I will probably be a sucker here, but I’ll go ABO b/c if you nix it, you don’t really then care much about future salary increases now do you. so I’ll stick with my guns… still on D. when you tell me it’s PBO i’m going to curse at pensions just a little more than i do already.
I think you can save on the cursing for the moment…your thinking re ABO is right. But I still don’t get how expected return is not 30 like in your calculation… Official Ans: C
Expected Return = expected return rate * Beg. Market related value of plan asset If we are going to use FV of plan asset then the formula would change to: Expected return = expected return rate * Fair value at the beginning of period = 7.5%*327 (beginning of 2007 = ending of 2006) = 24.525 (approx 25) Explanation for using ABO as termination liability is correct as given by bannisja. So I would go with C.
IF you have the end FMV of 395, and the actual return of 37. Howcome Beg FMV is not = 395 - 37 = 358 …and why doesn’t it match with 327?? Besides that… I would also go with ABO, considering they are terminating the plan, hence further increases in compensation and the additional liability attached thereof is irrelevant…
mumukada Wrote: ------------------------------------------------------- > IF you have the end FMV of 395, and the actual > return of 37. Howcome Beg FMV is not = 395 - 37 = > 358 …and why doesn’t it match with 327?? Employer contributions and benefits paid will take care of the remaining portion which is 358-327 = 31.
^^ right…of course…how silly
Great team work! Thanks guys. This q has been cleared up for me. Some of these q’s are killing me…
omg i’m a retard for not using beginning value. thx for the question. that should be easy points on the test. if ever they ask or interest charges also remember beginning PBO x discount rate.
So, what’s the answer?
I got C! The expected return on assets is equal to the beg.of the year balance in assets (=$327) mult. by the exp. rate of return. NOTE: This part is very tricky. Which interest rate to use - 7.5% or 7.8%? I have no clue, but both values don’t change the outcome much - one gives 24.5 and the other gives ~26. Since 26 wasn’t an option, the implied choice is $25. When the plan terminates today, we don’t take into account further service with the company. IGNORE PBO. We should focus on ABO. This is 570. But here’s my question: What if everyone is *NOT* vested? Then the liability is $0 - isn’t it?
boston_level2_candidate Wrote: > But here’s my question: What if everyone is *NOT* > vested? Then the liability is $0 - isn’t it? i think you are correct.
epoh Wrote: ------------------------------------------------------- > So, what’s the answer? C was the Schweser answer.
what question no is this please? is this from the schweser question bank?