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Author: Maddjoka One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 252  
Subject: Re: Pension Fund Acct--help Date: 1/20/2004 4:07 AM
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Oy, pension accounting. That's a pain. I should warn you, I'm not a CPA yet; I'm a student who's studying for the May exam. But at least that means I've worked with pensions in the past couple of years. I'm sifting through my textbook (published in 2001) for this one.

kitkat sez:
**net benefit obligation is the amount payable at time of filing
"Payable" is a bit inaccurate here, since if everybody retired right now, many would not be eligible for benefits, so those funds would be forfeited. But in a larger context, yes. Actuaries use a lot of statistics to factor in retirement and death and all that fun stuff.

**sevice cost is obligation increase retroactively due to improved benefits
Having trouble with the semantics, but I think you're on the right track. That's the increase in pension liability because of the fact that every employee now has an additional year of service.

**interest cost is the increase of present value due to being one year closer to payout
**benefits paid is money paid to retirees

Yep.

**obligation is current pension obligation
If you're referring to the line right after benefits, then it's just a matter of Jan. 1 versus Dec. 31. Note also that the ending balance for 2000 is the beginning balance for 2001.

**fair value is the current value of assets of the plan
**actual return is loss or gain on investment(loss in this case)
**contributions is the amount FNF paid in

Those all sound good.

**fair value is what the pension plan is worth and in this case they are underfunded
**funded staus at end of year is how much they are underfunded

Right again. Their net pension obligation right now is $111,000,000, and right now they have $66,000,000 worth of securities to back it up. That's not especially unusual, really; pension contributions don't always get the attention that they should. And most of that underfunding, as you pointed out, is charged to "net unrecognized actuarial loss," which means that a lot of it is contingent on events that haven't happened yet.

Questions:
**What is the unrecognized net actuarial (gain) loss? And why then is the net amount $273 at end of year? Aren't they still $44,900M underfunded since the plan assets are $66,232?
And along the same lines what is the actuarial loss of $16,085 in the first part of the table? Does it relate to the net actuarial loss?

You know that part where they added the extra time for years of service? Well, the PowersThatBe(tm) figured that most companies promise payments based on one's ending pay. Chances are that an employee's pay in thirty years will be more than what they're getting paid today. So, they reasoned, the liability should be inflated to account for that.

The actuary crunches those numbers, figuring in typical raises and retirements and all that, and the "unrecognized net actuarial (gain) loss" sort of deflates all that back to today's circumstances by backing out those predictions. This is much closer to showing whether they'd be able to pay off everybody if they retired. Again, eligibility and vesting and all that would still skew the numbers. In 2000 and 2001 Fidelity would have had to scrape up some money out of their own pockets, but 2002 brought better news.

**Aren't they being a bit optimistic assuming 9% return and using a low discount rate of 6.75%. Seems like they could be in real danger of coming up very short and have really decreased the amount they are required to put in by having such a low discount rate.
Not necessarily. That 9% is a little shy of the S&P 500 average gains over the last 75 years. So it's a reasonable expectation. And the 6.75% is probably their cost of capital, or what they'd have to pay if they had to take money out of operations or even borrow to pay off the pension obligation. Investments, of course, are expected to outpace the cost of capital, so that 2.25% isn't an unreasonable spread.

**Thanks to anyone that can help. Did I mention I love accountants?
Gawrsh!

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