Sachs Brands\' defined benefit pension plan specifies annual retirement benefits
ID: 3216371 • Letter: S
Question
Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.2% × service years × final year's salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 2004 and is expected to retire at the end of 2038 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $90,000 at the end of 2018 and the company’s actuary projects her salary to be $280,000 at retirement. The actuary's discount rate is 8%.
Required:
2. Estimate by the accumulated benefits approach the amount of Davenport’s annual retirement payments earned as of the end of 2018.
3. What is the company’s accumulated benefit obligation at the end of 2018 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)
4. If no estimates are changed in the meantime, what will be the accumulated benefit obligation at the end of 2021 (three years later) when Davenport’s salary is $115,000? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)
Explanation / Answer
Answer 2
Number of service years from 2004 to 2018 (both inclusive ) is 15.
2018 final salary is 90000
Accumulated Benefits Approach formula is
1.2% x no, of service years x final year salary
= 1.2% of 15 x 90000
= 16200
$ 16200
Answer 3
Retirement plan years is 18
Discount rate is 8%
PV of annuity of 1$ for 18 years at 8% is 9.371887
Annuity Value is 16200
Present Value of the retirement annuity at end of 2038
= 16200 x 9,371887
= 151824.572
A B O is the present value of the retirement benefits at 2018
That is for 20 years (from 2018 to 2038)
PV Factor is 0.2146 ( from the PV Table)
The A B O = 151824.572 * 0.2146
= 32581.55
$ 32582
Answer 4
For the year 2021, no. of years is 18
Estimated benefits approach for 2021 is
1.2% x 18 x 115000
= 24840
$ 24840
Present Value of the retirement annuity at end of 2038
= 24840 x 9,371887
= 243882.782
A B O is the present value of the retirement benefits at 2021
That is for 17 years (from 2021to 2038)
PV Factor is 0.2703 ( from the PV Table)
The A B O = 243882.782 x 0.2703
65921.5
$ 65922
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