# tricky pension Q

Co’s pension plan is underfunded by \$85. Unrecognized actuarial gains = \$12, unrecognized prior service cost = \$27. What is the amount of the pension liability under the OLD standards?

88

70

nope

46?

100

85+12-27=70

wandering, you got it… please enlighten the rest of us. why isn’t it 70???

OOPS… my bad, got it backwards (sorry my brain is mush right now)… maratikus was right - the answer is 70. Please explain…

Guess I was wrong…damn.

wandering, see my post above…

bannisja got it first. I just adjusted for unrecognized gains and losses. Someone compared it to indirect method. We start with funded status and adjust backwards. For example, since there was 12 unrecognized gain -> obligation should increase by 12. Unrecognized service cost (or loss) of 27 -> obligation should be decreased by 27. 85+12-27 = 70

exactly. when mvwt likened it to the indirect method, i think this was a nice way to think about it. reality is the 85, but it’s like you’re backing out the smoothed stuff. so if your service cost (remember COST, loss as maratikus says) is 27, since it’s unrecognized in the old standard or smoothed over years, you’d back that cost out. gain, the opposite. when in a huge pinch and it won’t work all the time, think that the new standard is more strict than the old standard so if you were completely guessing, I’d say pretty good shot the old standard liability would be less than the new standard. hence the slow death of the defined benefit plan in the US anyways…

mvwt, thanks for a great shortcut!

Wow, the indirect method. I like that comparison.

q assumes the word “underfunded” means “economically” underfunded (new stnd) this means the 87 as it stands also includes gains and losses already, now we need to adjust this liability to exclude the recognized gain (increase by 12) and exclude the recognized cost (decrease by 27)

here’s how i did it… underfunded hence liability = -85 with above adjustements: -85-12+27 = -70 thus your liability under old standards would be -70

I’m slow and I don’t get everyone’s explanation. If the funded status is a liability of 85 (hence underfunded), then wouldn’t an actuarial gain reduce the liability by 12, and prior service cost increase the liability by 27?

but its already included in the 87! so thats why its all backwards

Right. It is like going from NI back to EBIT. You have to undo all the was entered. For example add back dep to EDIT, etc. That is why I used the indirect method comparison.