Pensions

Defined Contribution Plans

A pension plan where the employer/sponsor contributes to a trust a determined amount each period

Defined Benefit Plans

A pension plan which defines the benefits an employee will receive in retirement

Types of Pension plans

Vested benefit obligation are measured by calculating the present value of expected cash out-flows for vested employees accrued to date at current salaries.

Accumulated benefit obligation are measured by calculating the present value of expected cash out-flows for vested and non-vested employees accrued to date at current salaries.

Projected benefit obligation are measured by calculating the present value of expected cash out-flows for vested and non-vested employees accrued to date at future salaries. preferred method

Components of Pension Expense

The computation of pension cost is complicated because it involves the following components.

1. Service cost is the expense of additional projected benefit obligations due to services rendered during the current year. Actuaries give the service cost at the present value of the benefits earned during the year.
2. Interest Being that a pension is a deferred compensation; the interest is discounted to take into account the time value of money. Interest accrues each year on the projected benefit obligation and is calculated by multiplying with the settlement rate, provided by actuaries.
3. Actual return on plan assets include interest and dividends plus the change in fair market value of plan assets. Stated another way the actual return on plan assets is the difference between the fair value of the plan assets at the beginning and the ending of the period, adjusted for contributions and benefit payments.
4. Gain or Loss is figured by taking the actual return and expected return on plan assets; plus amortization of unrecognized net gain or loss from previous periods.
5. Amortization of prior service costs (PSC) are allocated over the remaining service years of the affected employees.

Give our Pensions Worksheet a try next time you have a pension problem.