Sachs Brands\' defined benefit pension plan specifies annual retirement benefits

Question

Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.3% × service years × final year's salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 2002 and is expected to retire at the end of 2036 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $87,000 at the end of 2016 and the company's actuary projects her salary to be $265,000 at retirement. The actuary's discount rate is 9%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. What is the company's projected benefit obligation at the beginning of 2016 (after 14 years' service) with respect to Davenport? 2. Estimate by the projected benefits approach the portion of Davenport's annual retirement payments attributable to 2016 service. 3. What is the company's service cost for 2016 with respect to Davenport? 4. What is the company's interest cost for 2016 with respect to Davenport? 5. Combine your answers to requirements 1, 3, and 4 to determine the company's projected benefit obligation at the end of 2016 (after 15 years' service) with respect to Davenport.

Explanation / Answer

1. company's projected obligation after 14 year's service with respect to davenport would be :-

(given as per company's policy) 1.3 % x 79816.5(refer note) x 14 years = 14526.603

NOTE: salary at the end of 14 years (pv) = 87000(fv) / (1+0.09)

= 79816.5

2. benifit for 15 years would amount to = 1.3 % x 87000x 15 =- 16965

therefore, benefit attributable to 2016 would be = 16965 - 14526.603

= 2438.97

3. company's service cost can be defined as the amount of increment in present value of employee service .

likewise interest cost is the cost incurred by the company due to the increase in the present value of the defined benefit obligation .

hence the total of servcice cost and interest cost would amount to 2438.97

5. the total benifit obligation at the end of 15 years would be = 1.3% x 87000 x 15 = 16965

i.e, 14526.603+ 2438.97

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