1. 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 1999 and is expected to retire at the end of 2033 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $90,000 at the end of 2013 and the company's actuary projects her salary to be $240,000 at retirement. The actuary's discount rate is 7%.
a. Draw a time line that depicts Davenport's expected service period, retirement period, and a 2013 measurement date for the pension obligation. Service Period = 1997-2031 Retirement Years = 2031-2049 Measurement date= 2011
b. Estimate by the accumulated benefits approach the amount of Davenport's annual retirement payments earned as of the end of 2013. 1.6% * 15 * $90,000 = $21,600
c. What is the company's accumulated benefit obligation at the end of 2013 with respect to Davenport? The present value of the annuity as of the retirement date is: $21,600 * 10.05909 = 217,276 The ABO is the present value of the retirement benefits at the end of 2011: $217,276 * .25842 = $56,148
d. If no estimates are changed in the meantime, what will be the accumulated benefit obligation at the end of 2016 (three years later) when Davenport's salary is $100,000? 1.6% x 18 x $100,000 = $28,800 $28,800 x 10.05909 = $289,702 $289,702 x .31657 = $91,711