Pensions

Question 1

What are the types of Pension Plans?

Answer 1

Define Contribution Obligation

Define Benefit Obligation

Question 2

What are some characteristics of Defined Contribution plan?

Answer 2

• Employer makes periodic payments to the pension fund to individual employee’s account
• Employer does not guarantee the amount of benefits payout
• Employee bears all the risk because they payout benefits depend on their investment decisions

Question 3

What are some key characteristics of the Defined Benefit Plan?

Answer 3

• Defines the amount of pension benefits to be provided to each employer
• Employer responsible for providing the agreed benefits
• Employer bears the actuarial and investment risk
• Assumes pension plan is part of employee’s compensation earned when services are rendered

Question 4

What is the Projected Benefit Obligation (PBO)?

Answer 4

PBO at a certain date is the actuarial present value of all benefits attributed by the pension benefit formula

Measurement date = Balance Sheet Date

Question 5

Fair Value of Plan Assets

Answer 5

• Invested by trustee

- Segregated and restricted

Question 6

Plan assets change as a result of…

Answer 6

1) The return on investments (decrease/increase plan assets)
2) Benefit payments (decreases plan assets)
3) Contributions from the employer (increase plan assets)

Question 7

The required minimum Net Periodic Pension expense is determined by..

Answer 7

\+ Service Cost
\+ Interest Cost
- Expected return on plan assets
\+- Amortization of gains/loss
\+- Amortization of prior service costs/credit

Question 8

Characteristics of service costs include

Answer 8

• Actuarial Present Value of benefits attributed to services rendered by employees during the CURRENT PERIOD
• Increases PBO
• Increase Pension Expense & unaffected by the funded status of the plan

Question 9

What is the formula to calculate interest cost?

Answer 9

Beginning PBO x Discount rate = Interest Cost

Question 10

What is the formula to calculate the Expected Return?

Answer 10

Expected Return on plan Assets is the Market related value of plan assets (MRV).

MRV x Long-Term Rate = Expected return