Question

Recently the company decided to initiate a pension plan as part of its employee compensation package. The pension plan will start on January 1, 2019. As required by accounting standards, the controller of the company needs to report the pension obligation (liability). The following estimates have been collected:

Average length of time to retirement                             15 years

Expected life duration after retirement                          10 years

Total pension payment expected each year

after retirement for all employees                            $800,000 annually

On the basis of the information above, determine the present value of the pension liability. Assume the payment is made at the end of the year and the interest rate is 8 percent.  

Answer 1

Present Value of Pension Liability can be estimated as under :

YEARS	OBLIGATION	PRESENT VALUE FACTOR	PRESENT VALUE
1	0	0.926	0
2	0	0.857	0
3	0	0.794	0
4	0	0.735	0
5	0	0.681	0
6	0	0.630	0
7	0	0.583	0
8	0	0.540	0
9	0	0.500	0
10	0	0.463	0
11	0	0.429	0
12	0	0.397	0
13	0	0.368	0
14	0	0.340	0
15	0	0.315	0
16	800000	0.292	233512
17	800000	0.270	216215
18	800000	0.250	200199
19	800000	0.232	185370
20	800000	0.215	171639
21	800000	0.199	158925
22	800000	0.184	147152
23	800000	0.170	136252
24	800000	0.158	126159
25	800000	0.146	116814
			$1692238