Question

The projected benefit obligation and plan assets were $170 million and $200 million, respectively, at the beginning of the year. Due primarily to favorable stock market performance in recent years, there also was a net gain of $65 million. On average, employees’ remaining service life with the company is 10 years.

As a result of the net gain, what was the increase or decrease in pension expense for the year

Answer 1

Solution:

Calculation of increase / decrease in the pension expense:

Particulars	Amount (millions)	Amount (million)
Net gain		$65
Less:
10% of the plan assets(200 *10%)		$20
Excess gain at the beginning		$45
Average remaining service period in year		10
decrease of pension expense for the year($45 / 10)		$4.5

Note: A net gain or net loss effect pension expense only if it exceeds an amount equal to 10% of plan PBO, or 10% of plan assets, whichever is higher . In the above calculation, the plan assets are higher than the PBO.