CFA EOC question 11 (chapter 23) says the actual return on plan assets is the expected return on plan assets plus actuarial gains. Why? I don’t get this…spent ages trying to answer the question by deriving economic pension expense then solving (which didn’t work) – any advice guys? Thanks!!
i have not read the question but actual returns are just what they say…actual. Pension expense deducts expected gains. I this case i suspect that expected returns were less than actual. So your actuarial assumptions (expected returns would = x) were lower than the return the assets saw in reality. You would record this differnce as an actuarial gain. So all else equal the actuarial gain + expected return = actual return.
note that other items can produce actuarial gains or losses since they arrise from any of the many assumptions used (life expectancy, final sallary, years service bla bla)
Refer to pages 203 and 221.
Actuarial gains and losses = Expected returns - actual returns on plan assets, and changes in actuarial assumptions.
I hated some of the questions too, especially those with CF and NI adjustment. I didn’t understand them completely but have left them as grey areas and will take these questions again during questions session.
As far as I understood about this question, expected returns covers everything based on assumptions and known data at the time of estimating these returns, the only thing changes if there is a gain/loss due to misestimation so actuarial gain/loss must be the difference between expected return and actual return.