115 CFA
File: Financial Analysis - Reading 28 - 10. Defined Contribution and Defined Benefit Pension Plans

10. Defined Contribution and Defined Benefit Pension Plans

j. compare the presentation and disclosure of defined contribution and defined benefit pension plans;

What is a pension plan?
A pension plan provides benefits to retirees for services provided during employment.

What is a pension fund?
A pension fund is often used as an intermediary to satisfy the employer's pension obligations. Pension fund assets need to be invested to meet the needs of the retirees.

What are the two types of pension plans?
- Defined contribution plans
- Defined benefits plans

What is a defined contribution pension plan?
In a defined contribution plan, the employer agrees to contribute a certain sum each period based on a formula. This formula may consider such factors as age, length of employee service, employer's profits, and compensation level. Only the employer's contribution is defined; no promise is made regarding the ultimate benefits paid out to the employees.

What is a defined benefit pension plan?
A defined benefit plan defines the benefits that employees will receive at the time of retirement.

What is an actuarial rate of return?
An actuarial rate of return is the discount rate used to find the present value of the plan's future obligations and therefore determines the size of the firm's annual contribution to the pension plan.

What are the components that make the determination of pension costs?
- Service cost - the actuarial present value of pension benefits attributed to employee service in a period, based on the pension benefit formula.
- Interest cost - the growth in Projected Benefit Obligation (PBO) during a reporting period.
- Expected return on plan assets
- Actuarial gains and losses
- Prior service costs

What are prior service costs (PSC)?
Prior service costs (PSC) result from the granting of pension benefits for service rendered before the pension plan began or from plan amendments granting increased pension benefits for service rendered before the amendment. It is the present value of the retroactive benefits.

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