jan 24 113.pptx - Fund Assets Jan 1 fund balance Funding...

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1 Fund Assets Jan. 1 fund balance xx Funding contribution xx Earnings on fund xx * Employee contributions xx (if plan is contributory ) Retiree payments (xx) Dec. 31 fund balance xx * This is called “actual return” and includes stock appreciation, dividends, interest, real estate gains etc.) We use “expected return” when computing
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2 Events Affecting the Two Sides Assets (Trustee) PBO Employees work one more year Funding contribution Retirees are paid benefits Pension fund earns $50 mil Life expectancy has increased Turnover was lower than estimated last year Estimated rate of salary increase is decreased
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3 Events Affecting the Two Sides Assets (Trustee) PBO Employees work one more year 0 + Funding contribution + 0 Retirees are paid benefits - - Pension fund earns $50 mil + 0 Life expectancy has increased 0 + Turnover was lower than estimated last year 0 + Estimated rate of salary increase is decreased 0 -
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4 Pension Benefit Formula The amount of the benefit payments during the retirement period (far right side of previous diagram) are based on a pension benefit formula that considers several variables such as: age at retirement (older: higher retirement benefit) highest salary attained (higher salary: higher retirement benefit) number of years service (more years of service: higher retirement benefit)
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5 Example Annual pension benefit (payment to retiree) = (age/65) x (highest salary) x (years of service/40) Subject to: benefit cannot exceed highest salary The annual amount is divided by 12 to yield the monthly benefit payment. These are the amounts in the right side of the previous diagram.
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6 Continued Jo retires at 62, with highest salary of $80,000, after completing 25 years of service: Jo’s annual benefit (paid in 12 checks) = (62/65)($80,000)(25/40) = $47,692 The actuary uses these amounts to compute PBO, pension expense, and other reported amounts. Sponsors use actuaries to do all the liability-side calculations each year.
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7 Continued The formula has two major purposes: 1. determining the actual retirement benefits for retirees 2.
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