Longfellow Group maintains a defined-benefit pension plan for all its domestic employees. The projected bene obligation (PBO) was determined using a discount rate of 7%. The expected rate of compensation growth is 5%, and the expected rate of return on plan assets is 15%. The pension plan is currently over-funded.
1. Indicate (higher, lower, no effect) and briefly explain the effect of an decrease in the discount rate on:
a. The PBO in the year of change
b. Pension cost in the year of change
2. Indicate (higher, lower, no effect) and briefly explain the effect of an decrease in the expected rate of compensation growth on:
a. The PBO in the year of change
b. Pension cost in the year of change
3. Indicate (higher, lower, or no effect) and briefly explain the effect of an decrease in the expected rate of return on plan assets on:
a. The PBO in the year of change
b. Pension cost in the year of change