To calculate benefits paid there is two method, one from plan assets at the start of the year and the other from benefit obligation at the start of the year. In the two methods we are adding employee contribution. I don’t understand why employee contribution is considered both as an asset and as an obligation ?
This employee contribution threw me for a loop too. I thought it was put in there to trick us because (and maybe I’m totally wrong here) but every problem I’ve done prior to this always focused only on employeR contributions. Since we’re dealing with DBs here, I thought that was just put in there to hammer home that the onus is on the employer to fund the plans and of course got the question wrong thinking CFA was trying to be sneaky. Oops.
I guess the way to look at it is it’s an asset currently in the employer’s control to generate return with but at the same time it’s an obligation owed back to the employee down the line? I don’t know, I hated this question…
^+1
I revised the CFAI curriculum and haven’t found anywhere to mention employer contribution. That’s quite unfair. Similar for stock grants, stock options etc. The provided examples are unsufficient imo.
I think this is correct. It’s an asset that will earn returns, but its added to the obligation since it’s owed to the employee.
The whole plan is owed to the employees, remember. So this (employee) contribution doesn’t seem to be any different when you use that perspective.
Yeah, just to make myself feel better, Schweser’s write up on the components of plan assets just says “contributions” so fair enough… I’ll take my beating… like a baby and whine more. Wah.
Got this one wrong too. Thanks.
From what I was able to demystify (i don’t wanna put more time on this) :
For Fair Value Assets : Use (employee + employer) contributions when you calculate the reconciliation between begin and end.
For Pension Plan Obligation : Add employee contribution when you calculate the reconciliation between begin and end.