Question

Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.6% × 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 $89,000 at the end of 2016 and the company’s actuary projects her salary to be $275,000 at retirement. The actuary's discount rate is 7%. (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:
2.	Estimate by the accumulated benefits approach the amount of Davenport’s annual retirement payments earned as of the end of 2016.

     

3.	What is the company’s accumulated benefit obligation at the end of 2016 with respect to Davenport?

     

4.	If no estimates are changed in the meantime, what will be the company’s accumulated benefit obligation at the end of 2019 (three years later) when Davenport’s salary is $110,000?

     

Answer 1

2	the amount of Davenport’s annual retirement payments = 1.6%*service years * final year salary
						= 1.6%*15*89000
						$ 21,360.00
3	the company’s accumulated benefit obligation at the end of 2016 with respect to Davenport
	The PV of retirement annuity as of the retirement dated (end of 2036) is
		$21360*10.05909 = $214862
	*10.05909 = sum of PV of 7% for 18 period
	The ABO is the PV of reirement benefir at the end of year 2016
		= $214862*0.258419 = $555,24
	*0.258419 = PV of 7% for n= 20
4	Annual retirement payment = 1.6%*18*$110000
			= $31680
	The PV of retirement annuity as of the retirement dated is
		$31680*10.05909 = $318672
	*10.05909 = sum of PV of 7% for 18 period
	The ABO is the PV of reirement benefir at the end of year 2019
		= $318672*0.316574 = $100883
		100883.3
	*0.316574 = PV of 7% for n= 17