Pensions (SFAS 87)
 regular payments made to employees after retirement. Covered under ERISA
(Employee retirement income security act, 1974) Protected by PBGC (Pension benefit
guarantee corporation)
I.
Definitions
A.
Type of Pension Plans:

Defined Contribution Plan
 Amount of contribution is
predetermined (may be adjusted periodically). Amount of future benefit
varies, depends on variety of factors. Employees bear risk.

Defined Benefit Plan
 Amount of future benefit
predetermined on the basis of some type of actuarial model. Contribution
depends (may vary) on a variety of factors. Company bears risk.
B.
Type of Benefit Obligations

Projected Benefit Obligation
 PV of pensions earned by employees in
previous periods, vested or non-vested (based on expected future salary
levels)

Vested Benefit Obligation
 Only vested obligations, based on
current salary levels (employee is entitled to a pension, even if s/he quits now)

Accumulated Benefit Obligation  Vested, non-vested obligations, based on
current salary levels (amount payable to employees if plan is terminated now)
C.
Type of Service Cost

Current service Cost
employees in current period

Accumulated prior service costs
 PV of benefits awarded to
employees for work in periods prior to adoption of pension plan or as a result
of retroactive changes in plan (amounts not yet taken into income) Note:
companies are not required to immediately recognize the expense. Since
employees are still working, this cost may be amortized over the remaining
service life.
D.
Elements of Plan Assets, Pension Expense, Pension Liability

Current service Cost
employees in current period
 PV of pensions earned by
 PV of pensions earned by

Accumulated prior service costs
 PV of benefits awarded to
employees for work in periods prior to adoption of pension plan or as a result
of retroactive changes in plan (amounts not yet taken into income)

Plan Assets 
 of prior contributions
+/- of income (loss) in prior periods
-  Payments made to retirees
+/- current period income (loss)
+ current contribution


Interest Cost
discount rate
Pension Expense
 Beginning projected benefit obligation X
1.
2.
3.
4.
Current service cost
+ interest cost
- expected return on plan assets
+/- loss(gain) due to difference between expected rate vs actual rate of
return on plan assets
5. +/- loss(gain) due to differences between expected vs actual value of plan
assets  Recognized to the extent that gain(loss) exceeds 10% of the
greater of obligations or fair value of plan assets
6. + amortization of unfunded prior service cost

Firm's Total Obligation
1.  Projected Benefit Obligation + Accumulated prior service costs +
accrued interest +/- changes in plan adopted retroactively
2. + PV of pensions earned by employees in current period  Current
Service Cost
3. - payments made to retirees
4. = Ending Projected Benefit Obligation

Unfunded (Accrued) Pension Liability or Prepaid Pension Cost
Results from difference between Pension Expense and Funding


Amortization of Unrecognized Prior Service Costs
1. Straight line method: Cost / average remaining service life
2. Years of future service method: cost X # of employees working/  of
expected years of future service
Unrecognized Gains/Losses/ Prior service costs
o Initially reported as part of Other comprehensive Income (OCI)
o Then amortized to pension expense. In the case of unrecognized
gain/losses only if the gain/loss persists for more than one year.