Module 9.5: Plan Assumptions

Question 1

discount rate

Answer 1

interest rate used to compute the present value of the benefit obligation and the current service cost component of periodic pension cost.

Question 2

rate of compensation growth

Answer 2

average annual rate by which employee compensation is expected to increase over time.

Question 3

expected return on plan assets

Answer 3

assumed long-term rate of return on the plan’s investments

Question 4

Increasing the discount rate will:

Answer 4

• Reduce present values; hence, PBO is lower.
• Usually results in lower total periodic pension cost because of lower current service cost.
• Usually reduce interest cost (beginning PBO × the discount rate) unless the plan is mature.

Question 5

Decreasing the compensation growth rate will:

Answer 5

• Reduce future benefit payments; hence, PBO is lower.
• Reduce current service cost and lower interest cost; thus, total periodic pension cost will decrease.

Question 6

Increasing the expected return on plan assets (under U.S. GAAP) will:

Answer 6

• Reduce periodic pension cost reported in P&L
• Not affect the benefit obligation or the funded status of the plan.

Question 7

Effect of Changing Pension Assumptions on Balance Sheet Liability and Periodic Pension Cost

Answer 7