A brief clarification would be helpful.
It is about the calculation to arrive end of year PBO. Within the CFA-Institute Topic Test, there is a test question that says employee contribution is to be included in the calculation. Got confused because could not find any reference in the study material. IFRS is relevant.
May somebody shed light on this!
Employee contributions increase plan assets and also pbo.
Thanks… however, can you possibly break it down why PBO is benefiting… just give us a piece more insight…
Hey sorry for the late reply i was confirming the same with my tutor and he says employee contributions only affect the plan assets and not pbo.I don’t know why i wrote it effects pbo plus it doesn’t make any logic aswell.
I don’t get this either, why is employee contribution added to benefit obligation according to the CFAI Topic test.
I have not yet taken that topic tests but the following equation might help?
- Pension Obligation at the beginning of the period
- Current service cost + past service cost+ interest cost+actuarial losses-actuarial gains - benefits Paid = PO at the end of period
- Fair value of plan assets at the beginning of the period
- Actual return on plan assets + contributions made by the employer to the plan - Benefits paid to the employees = FV of plan assets at the end of the period
Can we think of employees contrubution as an liability for holding someone else’s money because of which pbo increases?as an employee contributes to the plan in the end he is the one who is going to get the money.
BINGO! I ran into that question too - and yes got it wrong because of that. It makes logical sense though. Think about it (although let me preface this by saying I know a 401(k) is NOT a pension but work with me here). If you contribute to your 401(k) and your employer matches if you leave the employer you always get YOUR contribution back - it works the same way with a pension. If you contribute money to it then you are always entitled to get that money back if you leave the employer thus increasing PBO - remember PBO stands for pension benefit OBLIGATION. They are obligated to at least give you your contributions back.
So finally we have cracked this case.Great your explanation was way better.Thank you.
I actually used to work as a pension actuary, so let me try to add to the explanation:
Assets are held in a trust. The ultimate point of all the assets is to fund future benefit payments (the liabilities).
When you contribute money into a pension plan, it increases the value of the assets. However, the liability value (as measured by something like PBO) isn’t immediately affected. You can think of the liability as a present value measured of the future benefit payments owed to participants.