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Calculate the PBO for both scenarios

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Question - Wallingford defined benefit pension plan specifies annual retirement benefits equal to  1.5% × service years × final year's salary, payable at the end of each year. An employee with 18 years of service is expected to work 23 more years before she retires, and her retirement is expected to span 21 years. The company's actuary projects her salary to be $255,000 at retirement. The discount rate is 7%.

Suppose that the actuary made the following changes in assumptions and estimates:

Retirement will span 25 years (instead of 21)

Final salary is estimated to be $272,000 (instead of $255,000)

Discount rate is 6% (instead of 7%)

Required -

1. Without calculations, explain whether the longer retirement span will increase or decrease PBO?  You must explain your answer to receive credit.

2. Calculate the PBO for both scenarios (original and revised assumptions). Calculate the gain or loss resulting from the implementation of all three changes above. Specify whether it is a gain or a loss. You must show your work to receive credit.

Reference no: EM132966896

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