Ch 20 HWq - Ch 20 Homework Questions Q2. Differentiate...

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Ch 20 Homework Questions Q2. Differentiate between a defined-contribution pension plan and a defined- benefit pension plan. Explain how the employer’s obligation differs between the two types of plans. A defined-contribution plan specifies the employer’s contribution to the plan usually based on a formula, which may consider such factors as age, length of service, employer’s profit, or compensation levels. A defined-benefit plan specifies a determinable pension benefit that the employee will receive at a time in the future. The employer must determine the amount that should be contributed now to provide for the future promised benefits. In a defined-contribution plan, the employer’s obligation is simply to make a contribution to the plan each year based on the plan formula. The benefit of gain or risk of loss from assets contributed to the plan is borne by the employee. In a defined-benefit plan, the employer’s obligation is to make sufficient contributions each year to provide for the promised future benefits. Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the promised benefits. Q5. What is the role of an actuary relative to pension plans? What are actuarial assumptions? An actuary’s role is to ensure that the company 1) has established an appropriate funding pattern to meet its pension obligations, 2) to make predictions and assumptions about future events and conditions that affect pension costs, and 3) to assist the accountant in measuring facets of the pension plan that must be reported (costs, liabilities and assets). In order to determine the company’s pension obligation, the actuary must first determine the expected benefits that will be paid in the future. To accomplish this requires the actuary to make actuarial assumptions, which are estimates of the occurrence of future events affecting pension costs, such as mortality, withdrawals,
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disablement and retirement, changes in compensation, and changes in discount rates to reflect the time value of money. 00 ** Q6. What factors must be considered by the actuary in measuring the amount of pension benefits under a defined benefit plan? In measuring the amount of pension benefits under a defined-benefit pension plan, an actuary must consider such factors as mortality rates, employee turnover, interest and earnings rates, early retirement frequency, and future salaries. Q7.
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This note was uploaded on 01/13/2011 for the course ACT AC 557 taught by Professor George during the Spring '10 term at DeVry Chicago.

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Ch 20 HWq - Ch 20 Homework Questions Q2. Differentiate...

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