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2019. Sisters Inc., is now a worldwide pet food conglomerate, run by two sisters, Big Sister, the...

2019. Sisters Inc., is now a worldwide pet food conglomerate, run by two sisters, Big Sister, the CEO, and Little Sister, the President. As a result of a massive “we are the 100% minus 1% strike,” that attracted national media attention, the company started negotiating a new union agreement with its employee union, “Pets R. US” effective January 1, 2019, and as the new union representative, Guy W.G. Shepherd is responsible for determining how the agreement will impact the company’s overhead, especially its defined benefit pension plan.

Moreover, Guy needs to decide if the agreement is fair and whether Sisters Inc. is not “lowballing” and can really afford to provide a higher pension expense to its employees and avoid future labor strikes.

As a threshold for “lowballing,” the union agreed that pension expense should be at least 1% of Sister’s budgeted net income for 2020, based on what other pension plans are offering and the theme of the last labor strike. Therefore, if the pension expense is greater than 1% of budgeted net income, Guy W.G. Shepherd is prepared to accept Sisters’ proposal on behalf of “Pets R Us.” If it is less than 1%, it’s back to the drawing board for further negotiations.

At first, Sisters Inc. wanted to delay the negotiations and give W.G. Shepherd some pumpkin and chicken (his favorite meal) and even offered to invite him to his favorite ball game, but W.G. Shepherd refused since he didn’t want that to influence his decision-making ability as a steward and representative of the union.

After a late night of negotiations Sisters’ CEO Big Sister finally gave W.G. Shepherd something real to chew on. Sisters Inc. proposed a new defined pension plan called the “Meow Max Plan” that creates a defined benefit plan for employees who are expected to retire in six years at the end of 2025 since those were the employees who were most active in the recent strike.

Mew Max Pension Plan Details and Assumptions

Employee Details

Discount rate

5.50%

Start of Plan

1 Jan. 2019

Pension Plan Benefit Payments

Expected retirement date

31 Dec. 2025

Annual payments are paid at year end and continue for 30 years, 100 employees are expected to retire in 2025.   At this time, Sisters Inc. has made no plans to provide any contributions to the plan, but may decide to do so in a few years.

Average Salary from last 5 years:

$50,000

Estimated years in retirement

30

Budgeted Net Income for 2020: $150 million

Benefit Formula: Average of Last 5 Years’ Salary × Number of Years of Service × 0.025

  1. What is the estimated retirement payment one employee will earn at the end of year after they retire as part of the Mew Max Plan? (Hint: Use benefit formula) -
  1. $7,000
  2. $7,500
  3. $8,000
  4. $8,500

2. What is the present value of estimated future retirement payments at the start of retirement for one employee? (Hint: Use the amount calculated above as your annuity payment and the given assumptions above for the number of years and discount rate)

  1. $85,505

B. $90,143

C. $103,050

D. $109,003

3. What is the average undiscounted service cost earned by employees each year? (Hint: Divide the amount you calculated above by the number of years of service)

  1. $15,024
  2. $18,029

C. $18,167

D. $21,801

  1. What is the discounted service cost component of the Meow Mix Pension Plan at the end of 2019 for just one employee (Hint: calculate the present value of the amount calculated above)
  1. $13,176
  2. $13,900
  3. $15,811
  4. $16,680

  1. What is the projected benefit obligation at the end of 2019? (Hint: include all employees covered by the plan)
  1. $1,317,600
  2. $1,390,000
  3. $1,581,100
  4. $1,668,000

  1. What is the service cost at the end of 2020 assuming just one employee was in the plan?
  1. $13,900
  2. $14,665
  3. $15,811
  4. $17,598

  1. What is the interest cost at the end of 2020?
  1. $50,000
  2. $76,450
  3. $85,961
  4. $91,740

  1. What is pension expense at the end of 2020?
  1. 1,390,000
  2. 1,466,500
  3. 1,543,060
  4. 1,545,625

  1. What is the projected benefit obligation at the end of 2020?
  1. 1,390,000
  2. 1,543,060
  3. 2,856,500
  4. 2,933,060

  1. Should W.G. Shepherd accept Big Sister’s proposal?
  1. Yes
  2. No
0 0
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Answer #1
Benefit Formula: Average of Last 5 Years’ Salary × Number of Years of Service × 0.025
Average Salary from last 5 years: $50,000
Estimated Retirement Payment One Employee Will Earn At The End Of Year
USING Benifit Formula
= 50,000 * 6* 0.025
7,500
Present Value Of Estimated Future Retirement Payments At The Start Of Retirement For One Employee
Annuity Factor for 30 Years @ 5.5% Per Annum 14.53375

Present Value Of Estimated Future Retirement = Annuity Factor * Estimated Retirement Payment

                                                                            = 14.53375 * 7500 = 109,003

Average Undiscounted Service Cost Earned By Employees

= Present Value Of Estimated Future Retirement / Number Of Years Of Service

= 109,003 / 6

= 18,167

Discounted Service Cost Component
At End of Year Annual Service Cost Discount Factor @ 5.5% Present Value
2025          18,167             1.0000       18,167.18
2024          18,167             0.9479       17,220.08
2023          18,167             0.8985       16,322.35
2022          18,167             0.8516       15,471.42
2021          18,167             0.8072       14,664.85
2020          18,167             0.7651       13,900.33
2019          18,167             0.7252       13,175.67

Projected Benefit Obligation at the end of 2019

= Discounted Service Cost Component * No. Of Employees

=13,176 * 100

= 1, 317,600

Service Cost At The End Of 2020 Assuming Just One Employee Was In The Plan
At End of Year Annual Service Cost Discount Factor @ 5.5% Present Value
2025          18,167             1.0000       18,167.18
2024          18,167             0.9479       17,220.08
2023          18,167             0.8985       16,322.35
2022          18,167             0.8516       15,471.42
2021          18,167             0.8072       14,664.85
2020          18,167             0.7651       13,900.33

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