# Why benefits paid to retirees deducted twice?

When you calculate your DBO at the end of year, you deduct what you paid to retirees, as that decreases your obligation. Makes sense. When you report your funded status on the balance sheet, it is equal to fair value of plan assets minus the DBO. That is, the status of your obligation is basicaly what your plan assets are worth minus what your plan obligation currently is. However, in calculating the fair value of the plan assets, you deduct benefits paid: FV(Plan assets) = Actual return of plan assets + plan contributions - benefits paid. Example: Beginning DBO = \$1m (I have an obligation to pay \$1m to my employees). I paid my retirees for the year \$100k, so my obligation (Ending DBO) is \$900k. To put that on the balance sheet, I need to report only the difference between my obligation (Ending DBO) and my plan assets fair market value (FMV). Assume plan assets were \$700k and they earned \$150k for the year. Ending FV(Plan assets) = \$700k +\$150k - \$100k = \$750k. Funded Status = \$750k - \$900k = -\$150k. In other words: Funded status = (\$700k +\$150k - \$100k) - (\$1000k -\$100k) = -\$150k See how \$100k was deducted twice? Of course, it cancels out but why include it twice? I can think of only one reason, which I didn’t see mentioned explicitly in the books, which is that benefits paid to retirees are different in one from the other…one based on year end and one at beginning of year? P.S. I learn from posting this more than I learn from thinking alone, even if no one replies…weird, isn’t it!.

then pray explain how they are the exact same number? No. The same amount with sign goes into reconciliation of both PBO and Plan assets. The payment goes out of the Plan Assets accumulation - hence it is a reduction there. You paid the benefits - so you liability reduces. So you remove it from PBO reconciliation.

I know they cancel out, but not sure why benefits paid shows up in FV and in DBO. By the same argument, shouldn’t plan contributions also appear in those two places? Plan contributions are only dedcuted from FV, not from DBO!

Think where the item goes to… then you will figure it all out. You are not reading the post fully, before coming up with your own. Plan assets go down by amount of benefits paid - this is because the plan assets are what is used to pay the current period retirees. PBO goes down by the SAME AMOUNT - because your liability reduces by the amount you paid your current period retirees. Plan Contributions has nothing to do with your liability. Company is putting money into the “fund” to help store up for future retirees. So only Plan Assets will go up because of that. You also have your post wrong when you say Plan contribs. are a deduction.

gotcha, Here is another one cpk, economic P.E… Begining FV(PA) = \$41,000 Ending FV(PA) = \$45,330 Begining DBO = \$35,000 Ending DBO = \$38,420 Contributions = \$5,050 What’s the economic P.E.? It’s easy, but I ran into a snag with this.

Begin FS=41-35=+6 End FS=45.33-38.42=6.91 Change in FS=0.91 - Empl. Contribs 5.05 ============== 4.14

0.91 - 5.05 = -4.14, right?

that is correct. Since its an expense the - was implied.

Ending Funded Status = \$6,910 Begin Funded Status = \$6000 So, I guess that means our funded status has improved by \$910 We made contributions of \$5,050, yet our pension expense is \$4,140? Could you walk me through this? Our P.E. calculation does not include what we pay in contributions (look at P.E. formula)? ok, I think I got it…do you see it? Phew.

the improvement in your funded status means you had to “economically” expense less –

yep…we are looking at P.E. from an “economic” point of view, so what we pay in contributions is an expense, which is *not* captured by the normal P.E… I think I said it right.