Frequently Asked Questions About Valuing Defined Benefit Plans
If the pension holder started receiving benefits at age 60 instead of 62 would the present value be higher or lower?
Analysis: The value is higher because pension holder will receive the monthly benefit for two additional years. Conversely, the value would be less if Pension Holder retired at age 65.
If the Interest Rate used in the valuation process was 5.00% instead of 6.00%, would the present value be higher or lower?
Analysis: To accumulate the same total amount of money over a given period of time, more money would initially have to be invested at 5.00% than at 6.00%. Conversely, the value would be less if the rate higher than 6.00%.
What is a 'Coverture Fraction"?
Answer: This represents that portion of the value of the benefits attributable to the marriage. The numerator of the fraction represents the total period of time the pension holder participated in the plan during the marriage and the denominator is the total period the pension holder participated in the benefits program.
If the monthly benefit were $1,200 instead of $800 would the present value of his benefit be higher or lower?
Analysis: Provided all other assumptions and facts remain constant, the present value will increase as the monthly benefit increases and vice versa.
If the pension holder is expected to live longer, will the present value be higher or lower?
Analysis: The pension holder would be receiving the monthly benefit for a longer period of time.
If the monthly benefit increases from $800 to $900 and the interest rate increases from 5.00% to 6.00%, what would happen to the present value of the benefit?
Answer: If the benefit and the interest rate increase, the tendency is to counter balance. Other changes would generally result in the following:
If pension holder starts receiving benefits at age 58 instead of 62 and the monthly benefit is reduced in to $600 from $1200. What would happen to the present value of the benefit?
Answer: Generally, a decrease in the retirement age and the monthly benefit have a tendency to counter balance. Other changes would generally result in the following:
What is " Vesting" ?
Answer: Vesting means a nonforfeitable right to receive a pension even if one discontinues employment.
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