The pension benefit formula for Jay Corp. calls for paying a pension benefit of

Question

The pension benefit formula for Jay Corp. calls for paying a pension benefit of $750 a year for each year of service with the company plus 40% of the projected last year's salary at retirement. Payments begin one year after the employees reaches the age of 65 and are paid annually thereafter. The average life expectancy of employees is 76 (That's 10 years into retirement since the first payment comes at the end of the first year).

The plan is adopted on January 1, 2005. One of the company's employees, Bob Smith, is given credit for 12 years of prior service. He is 52 years old at the date the plan is adopted. His current annual salary is $30,000, but his salary level when he retires in 13 years is expected to be $45,000.

Assume an 8% rate of interest for both the discounting ("settlement rate") and expected earnings rate on plan assets. Assume Jay Corp. fully funds the estimated PBO on January 1, 2005 and the invested funds earn an actual return of 12% in 2005.

1) Determine the projected benefit obligation related to Smith's pension benefits as of January 1, 2005.

2) what would the project benefit obligation be on January 1, 2006

3) How much pension expense should Jay Corp. recognize in 2006 for Smith? Show the component's of the pension expense.

Explanation / Answer

I have taken 10 years for pension calculation and not 12 since the average life expentency of employee is mentioned as 10 years.  

Pension calculations 750 each year plus 40% last year salary (i.e. $45,000) $18,750.00 Interest @ 8% pa Total for one year $ 18,750.00 $ 1,500.00 $20,250.00 for ten years $ 187,500.00 $15,000.00 $202,500.00 Pension calculations 750 each year plus 40% last year salary (i.e. $45,000) $18,750.00 Interest @ 12% pa Total for one year $18,750.00 $ 2,250.00 $ 21,000.00 for ten years $187,500.00 $ 22,500.00 $210,000.00

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