Impact of Discount Rate Change on Pension Underfunding in Year 3.
Assume a employee has a salary of $ 75,000. The employee's salary is expected to grow at 2.5% per annum. The employee is expected work 25 years and then retire. The pension program provides the employee a defined benefit equal to 2.0% of his salary in year 25 for each year worked. The employee has a expected life expectancy of 35 years at retirement. The firm uses a 4% discount rate to determine pension obligations.
The firm anticipates depositing $9,000 at the end of each year to fund their retirement obligation. Funds are expected to eam and do earn 6.0 per cent per annum.
- What is the pension cost in years 2 and 3
- What is the overlunder) pension funding at the end of year 3.
- Explain the logic for each of the three components of a firm's pension expense in any given year
- Change the discount rate to 5%, (corrected from an earlier posting that had it at 4%) What is the $ change in the underfunding in year 3?
- Explain the logic of the change in underfunding.
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