Impact of Actuarial Assumptions on Defined Benefit Plans

Hard Employee Compensation Defined Benefit Plans

A company has a defined benefit pension plan that provides employees with annual retirement benefits based on their salary and years of service. The company recently decided to change the actuarial assumptions used to calculate the plan’s pension obligations. Specifically, they revised the discount rate used from 4% to 5% and adjusted the expected rate of return on plan assets from 6% to 7%.

Based on these changes, which of the following statements regarding the pension plan’s funded status is most likely to be true?

The funded status of the plan will improve because the increase in the discount rate reduces the present value of future obligations.

The funded status of the plan will deteriorate because the change in expected return on plan assets increases the pension expense.

The funded status of the plan will remain unchanged as the changes in assumptions cancel each other out.

Hint

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