In a recent meeting of the board of directors, concern was expressed regarding the escalating balance in Accrued Pension Liability and the liability associated with Postretirement Benefits Other Than Pensions. Following that meeting, you were asked to review the actuarial assumptions to determine if those balances and the expenses related to those balances can be reduced.
Part of your analysis included reviewing the financial statements and notes of other companies. In a review of the financial statements of General Motors, you noted that they provide some sensitivity analysis relating to actuarial assumptions.
Given the significant effect that a seemingly minor change can have on estimated obligations, you are tempted to contact the actuary and have her modify her original assumptions and re-compute your company’s future pension and other postretirement obligations with these new assumptions:
• Reduce the weighted-average discount rate from 7% to 6%.
• Increase the expected long-term rate of return on the pension fund from 10% to 11%.
• Decrease estimated increases in future compensation levels from 6% to 5%.
• Decrease estimated increases in future health care costs from 6% to 5%.
1. What effect would each of these changes have on the PBO associated with pensions or the APBO associated with the other postretirement benefits?
2. What effect would each of these changes have on the expense reported on the income statement associated with pensions and other postretirement benefits?
3. What constraints are there (or should there be) on a company’s ability to influence actuarial assumptions?
4. While changing the assumptions may change the reported liabilities associated with pensions and other postretirement benefits, have the future economic obligations actually been changed?
5. What factors would you need to consider before you placed the call to the actuary?