Question

You are an analyst for Opulent Wealth Management. One of the companies you follow is Metagrobolize Industries. While looking at the company's financials, you have become concerned with certain aspects of Metagrobolize's defined benefit pension plan. You have enlisted the assistance of your staff to create a Tableau Dashboard depicting trends in pension expense, pension liabilities, and pension assets for the most recent ten years, plus projected amounts of pension liabilities, and pension assets for next year ($ in millions). Interest Cost Pension Expense Components of Pension Expense Expected Return Gain (loss) Amort... Service Cost 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 60 40 20 IT 111 -20

Answer 1

Required 1. The Funded status of a pension plan is the exess of plan assets over plan benefits obligations It is calculated as below:

Funded status = Pension Plan assets - Projected Benefits Obligations

Since projected benefits obligations are $578 mn and plan assets are $413 mn, there is a net pension liability of

578 - 413 = $165 mn

Required 2. From the graph of the trend of Funded Status Of Pension Plan, it can be clearly seen that the gap between the plan assets and the plan benefits obligations widened in 2020 which became a still wider gap in 2021. Hence the correct choice is: "Beginning in 2020, there is a sizeable and growing underfunding of the pension obligations".

Required 3. From a comparison of the chart of Components of Pension Expense and Actual Vs Expected returns, the correct choice can be observed as "The pension expense would have been even higher in 2019-21 if not for larger reduction in the expense for the expected returns on plan assets"

Required 4. From a comparison of the chart of and Actual Vs Expected returns and Components of Pension Expense, it can be observed that the correct choice is "Metagroborize increased its expected return on plan assets in 2018 and that increase contributed to the increase in pension expense."

Required 5. From an overall comparison of all the three charts it can be observed that the underfunding position of the pension obligations is sizeable and growing with a sharp increase in the expected returns. Hence, correct choice is:

"The sizeable and growing underfunding of the pension obligations together with the masking effect on the cost of the pension plan of increaseing the expected returns are cause for concern: