hi,
a very silly question.
Why are defined benefits obligation a type IV liability? I mean why typically when to pay out these pension benefits and how much as well based on all the calculations and the assumptions we make on the employees and how long they will live bla bla.
Wouldnt the obligation of a defined benefit be considered more of type I liability?
When, exactly, is Bob going to retire?
What, exactly, will Bob’s pension payment be when he retires?
Greetings friend - I think the logic behind it is that Type I liabilities are definitely known obligations in terms of timing and amount. One’s pension benefits are determined by salary level at retirement. Hard to predict what that will be now, if someone will switch jobs in the meantime, etc.
But even if you have a defined benefit plan that has known regular payment levels, you cannot definitely be sure how long the beneficiary will actually live (or their spouse, if their pension benefits can pass to them at death), so you cannot say with definite accuracy how much the final amount of the payments will be, or when the payments will end exactly.
You can use mortality tables to predict the statistical probability. But you do not know for sure whether someone (and perhaps their spouse?) will live to 66, 72, 88, 95, 110 etc.
A simple way to remember
Type I - Pre COVID
Type II - Amidst COVID
Type III- Post Vaccination
Type IV - The emergence of Delta variant
Caution : Consider the above ( serious) at your own peril. Pun intended.
But then whenever we talk about immunization or funded status, we know the total amount of liabilties. Then how should it be type 4?
What exactly is this?
We know the present value of liabilities that have been earned so far. We don’t know what’s going to be earned tomorrow, next week, next month, next year, or ten years from now.
Thanks sir…
My pleasure.