Economic Pension Expense = Δ Funded Status - Employer Contribution OR Employer Contribution - Δ Funded Status

CFA Level II FRA
#1

Hi,

I’ve seen some people use:

Economic Pension Expense = Δ Funded Status - Employer Contribution

and others use:

Economic Pension Expense = Employer Contribution - Δ Funded Status

So what is it? Here I have a plan with Funded Status of -291B in FY09 and -265B in FY10. So the Δ Funded Status is +26B. Employer Contribution is 48B.

Is EPE = 26B - 48B = -22B or 48B - 26B = 22B?

Thanks!

#2

Employer contribution - Change in funded status

#3

Thanks. But wouldn’t that imply that you are actually deducting rather than adding PBO items such as service cost?

#4

They are costs – so you would deduct them, normally, wouldn’t you? you are expected to pay them (albeit sometime in the future). They are COSTS, nonetheless, hence a liability, hence to be REMOVED (DEDUCTED).

#5

Thanks. The table I have reads: Δ PBO: Service Cost: 34 Interest Cost: 27 Participant Contribution: 8 Amendments: -7 Actuarial (Gain)/Loss: -4 FX Effects: -17 Curtailments & Settlements: -6 Benefits Paid: -36 TOTAL CHANGE IN PBO: +1 (Rounded) Δ Plan Assets: Actual Return: 15 FX Changes: -9 Employer Contribution: 48 Participant Contribution: 8 Curtailments & Settlements: -2 Benefits Paid: -27 TOTAL CHANGE IN ASSETS: +27 (Rounded) Δ Funded Status = Δ Assets - Δ PBO = 27 - 1 = 26 Employer Contribution = 48 EPE = 48 - 26 = 22

#6

Thanks. I was under the impression that these Costs are added to EPE (Service Costs + Interest Costs + … - Employer Contribution) because EPE is an ‘Expense’. Deducting them from EPE would mean reducing EPE…Sorry if its confusing but its my first time looking at these terms.

#7

I believe there is Economic Pension Expense - which is different from Pension Expense. Economic Pension expense is what the company would actually end up paying… (and as an analyst you need to concentrate on that number). Since the Obligations (PBO, of which service cost is a part) is not paid till way in the future, but still on the Balance Sheet / Financial statements - you are making an adjustment and considering only a TRUE expense from the company’s point of view for financial statement adjustments. This statement made just now is a little bit (in a sense) contrary to what I said before - but both are saying the same thing…

#8

Thank you. So as far as the Cashflow Statement entry “Accrual for Benefits” goes, that line time is actually Net Periodic Benefit Cost (Add back) less Employer Contribution (Actual Cash outflow). The EPE doesn’t really factor on the CF statement?

#9

The way I understand this economic expense is “how much did you spend which did not reduce your funded status”. That would be your contributions - delta funded status. Hope this helps a bit!