Analyzing and Interpreting Pension Disclosures

Assume General Mills reports the following pension footnote in its $10-$K report.

Defined Benefit Pension Plan $($$ millions$)20102009$

Change in Plan Assets

Fair value at beginning of year $ $4,097\mathrm{.}8$ $ $3,620\mathrm{.}3$

Actual return on assets $181\mathrm{.}1625\mathrm{.}9$

Employer contributions $14\mathrm{.}210\mathrm{.}6$

Plan participant contributions $3\mathrm{.}62\mathrm{.}8$

Divestitures$/$acquisitions $--2\mathrm{.}4$

Benefit payments $(175\mathrm{.}0)(164\mathrm{.}2)$

Fair value at end of year $ $4,121\mathrm{.}7$ $ $4,097\mathrm{.}8$

Change in Projected Benefit Obligation

Benefit obligation at beginning of year $ $3,257\mathrm{.}5$ $ $2,916\mathrm{.}4$

Service cost $80\mathrm{.}173\mathrm{.}1$

Interest cost $188\mathrm{.}7185\mathrm{.}6$

Plan amendment $1\mathrm{.}90\mathrm{.}2$

Curtailment$/$other $(0\mathrm{.}6)(0\mathrm{.}4)$

Plan participant contributions $3\mathrm{.}62\mathrm{.}8$

Actuarial loss $($gain$)(147\mathrm{.}1)244\mathrm{.}0$

Benefits payments $(175\mathrm{.}0)(164\mathrm{.}2)$

Projected benefit obligation at end of year $ $3,209\mathrm{.}1$ $ $3,257\mathrm{.}5$

Estimated benefit payments, which reflect expected future service, as appropriate, are expected to be paid from fiscal $2011-2020$ as follows:

$($in millions$)$ Defined Benefit

Pension Plans

$2011$ $ $176\mathrm{.}3$

$2012182\mathrm{.}5$

$2013189\mathrm{.}8$

$2014197\mathrm{.}5$

$2015206\mathrm{.}6$

$2016-2020$ $ $1,187\mathrm{.}3$

$($a$)$ Which of the statements below best describes what is meant by service cost and interest cost?

Service cost represents the additional pension benefits earned by employees during the current year but paid to employees in the future. Interest cost is the expense we incur on funds borrowed by the pension plan.

Service cost represents the wages earned by employees managing the pension plan during the current year. Interest cost is the expense we incur on funds borrowed by the pension plan.

Service cost represents the wages earned by employees managing the pension plan during the current year. Interest cost is an expense that accrues on the pension obligation during the year.

Service cost represents the additional pension benefits earned by employees during the current year but paid to employees in the future. Interest cost is an expense that accrues on the pension obligation during the year.

$($b$)$ What is the total amount paid to retirees during fiscal $2010?$

Round answers to one decimal place. If the number after the decimal place is a zero, do not enter it $($for example, $185\mathrm{.}0$ should be entered as $185).$

Answer

$($$ million$)$

What is the source of funds to make these payments to retirees?

pension liabilities

operating cash flows

pension obligations

pension assets

$($c$)$ Compute the $2010$ funded status for the company's pension plan.

Use a negative sign to indicate the pension plan is underfunded, if applicable.

Round answers to one decimal place. If the number after the decimal place is a zero, do not enter it $($for example, $185\mathrm{.}0$ should be entered as $185).$

Answer

$($$ million$)$

$($d$)$ Which of the following statements best describes what are the plan amendment adjustments, and how they differ from actuarial gains and losses?

Actuarial gains $($losses$)$ are decreases $($increases$)$ to the PBO resulting from changes in the assumptions used to estimate the pension or health care liability, while amendment adjustments are changes to the liability arising from amendments to the plan itself.

Actuarial gains $($losses$)$ are decreases $($increases$)$ to the PBO resulting from changes in the assumptions used to estimate the pension or health care liability, while amendment adjustments are adjustments made in accounting for the plan as a result of those estimates.

Actuarial gains and losses represent charges that the pension plan incurs from actuaries that it hires to perform various estimates, while amendment adjustments are adjustments made in accounting for the plan as a result of those estimates.

Actuarial gains and losses represent charges that the pension plan incurs from actuaries that it hires to perform various estimates while amendment adjustments are changes to the liability arising from amendments to the plan itself.

$($e$)$ General Mills projects payments to retirees of over $$175$ million per year. Which of the following statements best describes how it is able to contribute only $$14\mathrm{.}2$ million to its pension plan?

Federal law does not require companies to fund pension plans. Any contributions that General Mills makes are purely voluntary.

The funding for payments to retirees comes from the pension assets. General Mills, therefore, does not need to contribute its own funds to the pension plan.

Contributions to pension plans are made mostly by employees. Any contributions that General Mills makes are purely voluntary.

The funding for payments to retirees comes from pension assets. General Mills' plans are overfunded and investment returns currently provide the cash inflow.