I’m learning Post employment and have a question about defined benefit plan. At my country, only have defined contribution plan, so I don’t know clear about the effective of DB, what is the different between past service cost and current service cost?.. I need your help to understand clearly about DB! Thanks so much!
The text is rather tough to get through. Hope the following helps. Past service cost refers to pension obligations accruing as a result of participant services rendered in prior years. Most typically, when a DB plan is established (or amended), employees receive a benefit accrual for already having worked for the company. That liability is computed and charged against income over a period of years. Current service cost refers to obligations associated with employees having worked one more year (the current year).
Hank how much do you miss pensions & L2 FSA? Have you started studying for L3 yet?
I have started Level III. The materials are a lot more interesting and relevant, just as deep as Level II, but in a different way. I think it will be hard. Do I miss pensions and FSA? Although I’m glad to be done with it, it did help balance out other areas where I was much weaker.
Defined Contribution - employee puts part of his salary directly into plan, and buys investments in the plan (its an investment account that grows tax deferred). Some employers match a certain amount of the employees contributions. The risk lies on the employee - if the market crashes and his investments all lose their value, the mployee loses whatever he had accumulated Defined Benefit - employee earns benefits at retirement based on his previous earnings at the company and how long he worked there. Once he retires, the company pays him out a certain amount monthly or yearly until he dies (ignoring spousal benefits). The risk here lies with the company - they manage assets to try and have enough assets to match their pension liabilities, or what they owe and will owe to their employees. this is becoming a rarer. There is also some risk for an employee, as if a company fails, the employee may not receive his accrued benefits.
What you describe is a type of DC plan, the 401(k)/403(b) salary reduction plan. DC plans also include money purchase and profit sharing plans where the employer provides the contribution. Spanishesk Wrote: ------------------------------------------------------- > Defined Contribution - employee puts part of his > salary directly into plan,
Thank all for ur helps! And do not know how the DB plan affect to analysts when we analize the company and make the decision investing or not?
You’ll need to learn how to analyze financial statements of DB sponsoring companies for the test, and be able to compare an IFRS to a GAAP accrual (they’re different). If the whole topic area doesn’t sink in now, don’t worry. There’ll be plenty of discussion in the spring. minhphc Wrote: ------------------------------------------------------- > > And do not know how the DB plan affect to analysts > when we analize the company and make the decision > investing or not?
Hank - youre right. I was generalizing for simplicity (and for CFA I think thats enough to know).
Word?
Past Service Cost This is the additional Service Cost due to change in the Pension benefit formula. so now if today suddenly management thinks that Pension benefit would be payable at (3 X employee’s salary at the end of his working life X no. of working years) rather than (2 X employee’s salary at the end of his working life X no. of working years) it was following at the start of this year. So logically our PBO should increase right? because we would be paying more in future and we must provide for it today. Now we can assume that the revised formulae existed from the start itself, and find out what difference it makes to Service Cost in the previous years. So we must provide for the differance separately as Prior Service Cost in addition to Curent Service Cost for the year which is the increase due to -> 1 year.
More simply stated, it’s the pension cost that results for adopting or changing the pension benefit formula. For instance, a company establishes a new plan and this plan credits all current employees as if the plan existed for the past 10 years. On day one of the plan, therefore, there is an immediate liability (an increase in the PBO) for those past 10 years, and you have to stuff that expense somewhere. Instead of hitting the income statement all at once, it is amortized over a period of years. The deferred expense goes to the balance sheet, either in OCI (in GAAP) or against the funded status (in the case of IFRS). vgmalu Wrote: ------------------------------------------------------- > Past Service Cost > > This is the additional Service Cost due to change > in the Pension benefit formula. so now if today > suddenly management thinks that Pension benefit > would be payable at (3 X employee’s salary at the > end of his working life X no. of working years) > rather than (2 X employee’s salary at the end of > his working life X no. of working years) it was > following at the start of this year. So logically > our PBO should increase right? because we would be > paying more in future and we must provide for it > today. > > Now we can assume that the revised formulae > existed from the start itself, and find out what > difference it makes to Service Cost in the > previous years. So we must provide for the > differance separately as Prior Service Cost in > addition to Curent Service Cost for the year which > is the increase due to -> 1 year.
How is the Past Service cost different from Acutuarial Gain/Loss ?
Past service cost is due to changes to a pension plan that affect prior years’ service. For example, a union may negotiate a more generous plan that is back-dated for prior service. This would be a higher expense for the compnay. Actuarial gains/losses are related to changes in the actuarial assumptions (such as assumed length of service, etc), plus any differences between actual and expected investment returns on plan assets.
Past service cost is the Present value of higher benefits retroactively granted and earned to date.