Assignment 7 - Defined Benefit Overview 2

Question 1

**excess of the funding target over the value of the plan assets minus any credit balance for a DB plan

• added to the TNC = based on the funding target compared w/ the actual value of plan assets
• PPA = requires that it is amortized over 7-year period

Answer 1

funding shortfall

Question 2

title given to a person professionally trained in the technical and mathematical aspects of insurance, pensions, and related fields

Answer 2

actuary

Question 3

present value of a DB plan’s accrued benef.

Answer 3

funding target

Question 4

**term used for the present value of benef. expected to accrue during the plan year

PV of EE’s indiv. benef. accrued that year + increase in past service benef. due to increases in comp. = add all EE’s together to get this cost

• required by PPA
• designed to improve funding status of plans
• no additional costs when EE leaves comp.

Answer 4

target normal cost

Question 5

**the structure where the ER pays each retired worker’s pension as the pmt is due

• no accuml. of pension fund in a trust
• pay benef. each month as part of current cost
• NOT acceptable for an ERISA plan
• no actuarial assumptions
• “pay as you go”

Answer 5

current disbursement approach

(determining costs for DB plans)

Question 6

term for value benef. to be paid after more than 20 years from the beginning of the plan year

Answer 6

third segment rate

Question 7

benef. pd + admin costs - inv. earnings

over the life of the plan

estimates of these various components

Answer 7

Ultimate Cost

(determining cost of DB pension plan)

Question 8

Estimate of Benefits Paid - depends on:

(Ultimate Costs)

Answer 8

1. benefit provisions
2. Employee demographics (sex, age, salary, length of service)
3. actuarial assumptions

Question 9

why are the actuarial assumptions part of the cost?

Answer 9

**assumptions drive the amt that is funded, which then determines the amt of money in the plan that will earn interest.

• if assumptions cause low contrib. in early years = plan will be underfunded in future requiring higher contribs. then.
• if assumptions cause high contrib in early years = future contribs. needed may be decreased

Question 10

**when a person retires, ER will then set a lump of money aside for the retirement benefit promised under the plan.

• no money is set aside until then
• actuarial assumptions are relative to how long the EE will live and what the int. earnings will be
• NOT acceptable for an ERISA plan

Answer 10

terminal funding approach

(determining costs for DB plans)

Question 11

**contrib. are made during the EE’s period of employment for the future retirement benef.

• more stable level of funding based on assumptions
• permits ER’s to incur costs of providing pension plan benef. fairly evenly over the lifetime of the plan
• provides buffer for yrs of lower earnings and yrs of high earnings

Answer 11

Advance Funding approach

(determining costs for DB plans)

Question 12

Types of Assumptions

Answer 12

1. retirement
2. mortality
3. disability
4. turnover
5. salary
6. investment

Question 13

• all companies face this assumption
• investement returns are averaged over number of years
• PPA = set period for averaging at no more than 25 months

Answer 13

Investment Assumption

Question 14

Required Minimum Contribution (under PPA)

Answer 14

plan assets - funding target

• qrtly contrib. are required if there was a required contrib for the prior year

Question 15

PBGC

Answer 15

• establ. under ERISA
• covers most DB plans
• created an insurance program, funded by premiums paid by the plan sponsors
• insure benef. should a plan a sponsor have sufficient assets in the plan
• concern = plans will term w/o sufficient assets, leaving the PBGC to make up the difference

Question 16

DB cost factors

Answer 16

• longevity of partic.
• age, sex, salary and lenght of service of partic
• earnings of plan assets
• benef. formula

Question 17

DB Contrib. Limit

Answer 17

Great of:

1. The plan’s: funding target + target normal cost + cushion amt - plan’s unreduced assets for plan year
2. min. required contrib. for the plan

Question 18

DB plan assets FMV under PPA

Answer 18

current MV is used

some amt of smoothing is permitted - based on avg’d asset value over 2 yrs and w/in a range of 90% to 110% of FMV on plan’s valuation date

Question 19

(4) factors used for the determination of the # of EEs who will be elig. for benef. under a pension plan

Answer 19

1. mortality rates among active EE’s
2. rates and duration of disabilities among active EE’s
3. layoffs and voluntary terms of employment (turnover)
4. rates of retirement at different ages (increased NRA = decreased retirement costs)

Question 20

(2) sets of probablities used by actuaries in evaluating cost of providing disability benef. in pension plans

Answer 20

1. rate of occurence (frequency) of disabilities
2. projection of duration of the disability

Question 21

admin expenses associated with the ultimate pension plan costs

Answer 21

• actuarial expenses
• legal expenses
• admin expenses
• inv expenses

Question 22

relationship b/w inv. rates and ultimate cost of a pension plan

Answer 22

inv. income earned reduces the ultimate cost of a plan (indirect relationship)

Question 23

type of acturial technique

used to determine how the estim. costs of a pension plan were to be spread over future yrs by estab. the amts and incidence of the normal and supplemental costs pertaining to the benef. of the plan

Answer 23

actuarial cost method

Question 24

(3) segment rates for calc. plan funding oblig. under PPA

Answer 24

value benef. expected to be paid:

• w/in 5 yrs from the beginning of the plan yr
• b/w 5-20 yrs from the beginning of the plan yr
• after more than 20 yrs from the beginning of the plan yr