Pensions PBO

CFA Level II FRA
#1

With a going-concern assumption we assume the firm continues operating and that the employee stays at the firm, so we use a prediction of their final salary. This gets a more accurate picture of the future pension payouts.

So why do we use the employee’s current number of years at the firm. Why not predict how long they will stay?

The only reason I can think of is because each year, employees earn more pension benefit (service cost) and the firm pays something into the plan assets, so they are matched off in the same time period.

#2

I don’t quite understand your question.

In what way do we use the employee’s current number of years at the firm?

#3

x = final salary

n = total number of years worked at the firm

maybe each pension payment will be x * n / 12

We estimate what x will be at retirement, but we don’t estimate n at retirement, we use today’s n (so far).

#4

  • I dont think we can predict the number of years the employee would stick with a particular firm with reasonable confidence.

  • You only earn extra pension benefit as you work one more year.

  • If we estimate n at retirement and use it in our calculation of PBO, it would result in a massive pension liability in the current period. This then implies possible if not a lot of adjustments later on if the employee only stay with the firm for, say another 5 years but you estimated it to be 15 years. There would simply be too much of volatility in the reported accounting figures (liabilities and pension expense).

#5

i looked at the GM statement

http://www.gm.com/annualreport/downloads/2013_GM_Annual_Report.pdf

page 44 breaks down the next 5 yrs and yr5-10, i.e. just like leases

there is a discussion on benefits for workers with 30yrs service. since the plan is closed to new employees I would think they could estimate this liability and disclose it…

for plans which are closed I would say there could be more information added which could be useful for analysis.

#6

thanks guys. yep, makes sense

#7

You’re welcome.