Pension

CFA Level II FRA
#1

Hi,

When we pay in extra contributions to the asset side, does Equity increase by the corresponding amount?

As a reference, CFA curriculum states that equity increase when liabilities decrease. And when we pay out (decrease assets), the obligations (liabilities) decrease by the same amount.

thx

#2

If you mean when the company makes an additional contribution to the pension fund, then the company’s equity will not change. Their cash goes down by $10 and their pension assets go up by $10; the net is zero.

#3

Ah, thx obviously, that makes perfect sense.

would you be able to elaborate on the reasoning why equity increases(decreases) when the PBO decreases(increases)?

#4

It’s the usual reason:

A = L + E

If the pension obligation increases (and pension assets are unchanged) then either:

  • Pension expense increases, or
  • OCI decreases

Either way, equity decreases. Assets are unchanged, liabilities are up, equity is down,

A = L + E

  • If the pension obligation decreases (and pension assets are unchanged) then either:
  • Pension expense decreases, or
  • OCI increases

Either way, equity increases. Assets are unchanged, liabilities are down, equity is up,

A = L + E

#5

Many thanks, highly appreciated

#6

You’re quite welcome.