In recent years, there has been a lot of media coverage about the funding status of pension plans for state employees in many stotes. the amount of money invested in employee pension plans is far less than the amount estimated to pay employees the retirement benefits they have been promised Basically pension plans work by investing enough money white employees are working so that the money invested, plus the investment income it earns over the years, will bo sufficient to pay the workers their retirement incomes once they thave retired. There are many complicated assumptions, estimates, and calculations needed to determine how much money a state should invest in its pension fund each year One of the most important assumptions is the rate of return the plan's investments will earn in the future. As you have seen in this chaptet, the higher the rate of return used to calculate the present value of future cash flows, the lower the present value will be. To determine a pension plan's funded status, actuaries (1) estimate the future cash payments expected to be made to employees, (2) calculate the present value of those cash flows using an assumed rate of return (this present value is the gross habily of the fund), and (3) subtract the amount of money that has been imvested from the gross bability calculated in step 2 (this amount is the funded status of the pension plan). Essentially, this is the same as calculating the net present value of an investmenit if the plan has less money in its investments than the present value of its estimated future cash flows, it has a net liability and is considered to be underfunded by that amount Many states' pension plans heve assumed they will earn 7 percent or more on their investments, even though many experts think a more appropriate assumption would be 5.5 percent. As an example, the state of Virgina used an assumed rate of return of 75 percent in 2009 but reduced the rate to 70 percent in 2010 . Actual imvostment returns con vary widely. In 2016 , Virginia's actual return on its pension assets was only 38 percent, but in 2017 if was 140 percent. Virginia paid out approximately $42 bilion in benefits to retirees in 2017 . (PV of 51 and PVA of $1 ) (Use appropriate factor(s) from the tables provided.) Required a. Assume Virginia's annual payments will continue to be $4.2 bilion, and that retirees will receive benefits for 20 years on average Using an assumed rate of retum of 7 percent, calculate the liability of the state's pension plan. The liability is the present value of the future cosh payments. (Be aware that the real world calculation for a statest pension plan liability involves many more assumptions than just these two.) b. Assume the annual payments will continue to be $4.2 billion, and that retirees will recelve benefits for 20 years on average Using an assumed rate of return of 5 percent, calculate the liablity of the state's pension plan (For all requirements, enter your answers in dollars not in billions.) In recent years, there has been a lot of media coverage about the funding status of pension plans for state employees in many stotes. the amount of money invested in employee pension plans is far less than the amount estimated to pay employees the retirement benefits they have been promised Basically pension plans work by investing enough money white employees are working so that the money invested, plus the investment income it earns over the years, will bo sufficient to pay the workers their retirement incomes once they thave retired. There are many complicated assumptions, estimates, and calculations needed to determine how much money a state should invest in its pension fund each year One of the most important assumptions is the rate of return the plan's investments will earn in the future. As you have seen in this chaptet, the higher the rate of return used to calculate the present value of future cash flows, the lower the present value will be. To determine a pension plan's funded status, actuaries (1) estimate the future cash payments expected to be made to employees, (2) calculate the present value of those cash flows using an assumed rate of return (this present value is the gross habily of the fund), and (3) subtract the amount of money that has been imvested from the gross bability calculated in step 2 (this amount is the funded status of the pension plan). Essentially, this is the same as calculating the net present value of an investmenit if the plan has less money in its investments than the present value of its estimated future cash flows, it has a net liability and is considered to be underfunded by that amount Many states' pension plans heve assumed they will earn 7 percent or more on their investments, even though many experts think a more appropriate assumption would be 5.5 percent. As an example, the state of Virgina used an assumed rate of return of 75 percent in 2009 but reduced the rate to 70 percent in 2010 . Actual imvostment returns con vary widely. In 2016 , Virginia's actual return on its pension assets was only 38 percent, but in 2017 if was 140 percent. Virginia paid out approximately $42 bilion in benefits to retirees in 2017 . (PV of 51 and PVA of $1 ) (Use appropriate factor(s) from the tables provided.) Required a. Assume Virginia's annual payments will continue to be $4.2 bilion, and that retirees will receive benefits for 20 years on average Using an assumed rate of retum of 7 percent, calculate the liability of the state's pension plan. The liability is the present value of the future cosh payments. (Be aware that the real world calculation for a statest pension plan liability involves many more assumptions than just these two.) b. Assume the annual payments will continue to be $4.2 billion, and that retirees will recelve benefits for 20 years on average Using an assumed rate of return of 5 percent, calculate the liablity of the state's pension plan (For all requirements, enter your answers in dollars not in billions.)
