Pension Trust
Some Pension Basics
Pension Trust
Valuation Assets Fair Value (usually very similar to Market value)
Obligations Present Value
Accounting activities that can change value
Assets Changes in the definition of fair value (Changes in the assumed long-term rate of return have NO impact)
Obligations Changes in actuarial assumptions, changes in the discount rate (a decrease in the rate increases the PV of the accumulated and projected obligation); changes in projected salary growth (an increase in the projected salary growth increases the PV of the projected obligation
Valuation of the obligation at the end of the period is based on the discount rate chosen at the end of that period.
Reporting the Pension Trust in the notes at Pfizer
As stated in table for 2000
Change in benefit obligation
Benefit obligation at the beginning of year $60,045
Service Cost 260
Interest cost 394
Employee contributions 9
Plan amendments 23
Plan net (gains) losses 168
Foreign exchange impact (233)
Acquisitions 6
Divestitures (5)
Curtailments 38
Settlements 4
Benefits paid (379)
Benefit obligation at the end of year $6,330
Change in plan assets
Fair value of plan assets at the beginning of year $6,172
Actual return on plan assets 365
Company contributions 110
Employee contributions 9
Foreign exchange impact (185)
Acquisitions 1
Divestitures -
Settlements 2
Benefits paid (355)
Fair value of plan assets at end of year $6,119
Funded Status
Plan assets in excess of/ (less than) benefit obligation $ (211)
Unrecognized net transition asset 2
Unrecognized net (gains)/ losses 289
Unrecognized prior service costs/ (gains) 263
Net asset (liability) recognized $343
Information related primarily to International plans:
Actuarial present value of accumulated benefit obligation
Fair value of plan assets $438
Accumulated benefit obligations 988
Fair value of plan assets $3,267
Projected benefit obligations 4,099
.
Pension Expense - (accrual accounting)
Components
Service Cost – present value benefits earned this period
Interest Cost -- growth of previously earned benefits at discount rate (usually chosen at the end of the previous year)
less: long-term return on assets -- based on assumed long-term rate of return on assets and value of assets (Asset value usually best estimated by fair value at the beginning of the period).
+ or - amortization of previous experience -- smoothes deviations of experience from assumptions into the expenses
Pension Expense
Service Cost $ 260
Interest cost 394
Expected return on assets (528)
Amortization of:
Prior service costs/ (gains) 29
Net transition asset (6)
Net (gains)/ losses 10
Curtailments and settlements (net) 40
Net periodic benefit cost/ (gain) $ 199
Assumptions
The primary ones reported in the notes are assumptions for the discount (settlement) rate, the long-term rate of return and projected salary growth.
If the discount rate is dropped, the PV of the pension obligation climbs, the plan may go from fully funded to underfunded (ABOAssets) and if the reported pension liability is less than the new level of underfunding, then the pension liability will rise, but the interest cost expense will fall causing pension expense to fall and income to rise.
If salary growth climbs, then the interest cost part of pension expense will climb.
If the long-term rate of return climbs, then the long-term return portion of the pension expense will climb reducing overall pension expense and increasing income.
An example
Pension expense at Pfizer (2000) as reported $199
If the company raised its long-term rate of return assumption one percent, then, using beginning assets the long-term return would climb by $61.7 (.01*6,172). In turn, pension cost would fall from $199 to $137.3 and pre-tax income would rise by $61.7.
Assumptions
Long-term Discount Salary
Statistic Valuation Rate of Return Rate Growth
Pension trust
Accumulated benefit obligation PV[1] X
Projected benefit obligation PV X X
Plan assets Mkt Use fair value (unaffected by assumptions)
Income Statement Expense
Service cost PV X
Interest cost PV X X
Actual return on assets Mkt Use fair value (unaffected by assumptions)
Long-term return Accrual X
Deferred return Accrual X (Actual-deferred = long-term)
Pension expense (cost)[2] Accrual X X X
Cash
Cash paid to (removed from) plan Cash flow (unaffected by assumptions)
Balance sheet
Pension asset (liability) Accrual X X X
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[1] Present value is a method of accrual
[2] Pension expense is an accrual expense based on several different accrual methods.
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