Chapter 20 – Defined Benefit Pension Plans Relevance of Discount Rate on PBO vs. Rate of Return on Plan Assets Let’s assume that a company adopts a new defined benefit pension plan on 1/1/11 and that the benefit formula is #yrs worked X avg. pay X 1%. As with many of our class examples, let’s assume that the company grants credit (or acknowledges) the prior service worked by existing employees. Specifically, the company has 213 employees that had each been working for 10 years as of 1/1/11. Thus, on 1/1/11, the company already has a future obligation. The actuary estimates that future obligation as the projected annual retirement pay (benefit) to be paid to the employees at retirement. For simplicity, let’s assume that these existing employees will all retire 35 years from now when each one is earning $100,000. Through 1/1/11, each one has earned a future annual benefit of $10,000 (10 years worked X $100,000 average pay X 1%) or $2,130,000 for the group payable in their first year of
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