Question
The City Manager of Valley Springs, is about to retire, and under the City's Defined Benefit plan, qualifies for a pension annuity of $125,000 paid
The City Manager of Valley Springs, is about to retire, and under the City's Defined Benefit plan, qualifies for a pension annuity of $125,000 paid annually.
You have been asked to calculate the pension liability associated with their retirement. Based on an actuarial expectation that the pension will need to be paid out for 25 years, and utilizing Valley Spring's assumption that the discount rate is 9 percent, calculate the amount required to fund fully the pension liability.
A. Please enter the answer and show how you calculated the answer using Excel.
B. A Council Member has read somewhere that a city should not use unreasonably high discount rates in calculating pension liabilities and wants to know whether the assumed 9 percent rate is too high. Explain why the use of too optimistic a discount rate can contribute to underfunding of pension liabilities.
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