Pensions: Contributions of Associates payments, economic, associates, 114, benefits

noel

On page 114 of the CFA FSA book, it says that the "economic periodic costs of a company's DB pension plan can be calculated... by summing each item (other than benefits paid) that increases or decreases the pension obligation and deducting actual returns on pension assets."

This makes perfect sense to me. However, in Example 7, which starts on page 119, the author computes the economic cost as the change in the pension obligation - benefit payments - contributions of associates. (Note that benefit payments is negative, so subtracting increases the resulting number.)

What is "contributions of associates" in this context? Are there any other items that need to be backed out of the pension obligation that the author neglected to mention at p. 114?

Thanks.

stalkey

There are a couple different ways to calculate economic pension expense (as it displays twice in the EOC's of that chapter).

"Contributions of associates" is money that the company has contributed to the pension plan and should reduce Pension Obligation. Whereas "Benefits Paid" are benefits paid out to employees leaving that qualify for the pension and increases the pension obligation. I think this is right anyways

wxs1986

Thanks . You are of course correct that the economic expense can also be computed as company contribution - change in funded status. However, it seems to me that the implementation of the other method as described on page 114 is inconsistent with the example at page 119. Also, in the example, "contributions of associates" actually *increases* the benefit obligation - how can a cash infusion from the company make the obligation go up?

cv4cfa

Oh I just looked at it. Because most examples you see the pension is Underfunded (which is usually the case in real life), but this pension is Overfunded. Therefore it does increase, not the "obligation" but the pension asset for once.

You have to be careful to see whether or not the pension is an obligation or asset to the company, b/c if its overfunded it is an asset.

giants2010

Ahhh.... thanks! So I take it that quote I had from p. 114 is just an error?