Based on Scenario 4 of Example 2 (10 years of prior service and the employee receives benefits for 20 years after retirement):

1. What is the effect on the Year 1 closing pension obligation of a 100 basis point increase in the assumed discount rate—that is, from 6 percent to 7 percent? What is the effect on pension cost in Year 1?

2. What is the effect on the Year 1 closing pension obligation of a 100 basis point increase in the assumed annual compensation increase—that is, from 4.75 percent to 5.75 percent? Assume this is independent of the change in Question 1.

Data from Scenario 4 of Example 2

Employee to receive benefit payments for 20 years and is given credit for 10 years of prior service with immediate vesting.

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Estimated annual payment (end of year) for each of the 20 years = (Estimated final salary x Benefit formula) x Years of service = (60,198.56 x 0.015) x (10+5) = 13,544.68. Value at the end of Year 5 (retirement date) of the estimated future payments = PV of 13,544.68 for 20 years at 6 percent = 155,356.41. Annual unit credit = Value at retirement date/Years of service = 155,356.41/15 = 10,357.09. Year Benefit attributed to: Prior years Current year Total benefits earned Opening obligation Interest at 6 percent Current service costs Closing obligation 1 2 3 4 5 103,570.94 113,928.03 124,285.12 134,642.21 144,999.30 10,357.09 10,357.09 10,357.09 10,357.09 10,357.11 113,928.03 124,285.12 134,642.21 144,999.30 155,356.41 77,394.23 90,241.67 104,352.18 119,831.08 136,791.79 4,643.65 5,414.50 6,261.13 7,189.87 8,207.51 9,217.77 9,770.84 10,357.11 90,241.67 104,352.18 119,831.08 136,791.79 155,356.41 8,203.79 8,696.01 *This is treated as past service costs in Year 1 because there was no previous recognition and there is immediate vesting.