Cima F2 Exam Question No 39

Question No 39:

Defined benefit plans?

The pension payable on retirement normally depends on either the final salary or the average salary of the employee during their career.

• The employer undertakes to finance a pension income of a certain amount, e.g. 2/3 × final salary × (years of service/40 years)

• The employer has an ongoing obligation to make sufficient contributions to the plan to fund the pensions.

• An actuary calculates the amount that must be paid into the plan each year in order to provide the promised pension. The calculation is based on various estimates and assumptions including: - life expectancy - expected length of service to retirement / employee turnover - investment returns - wage inflation.

• Therefore, the cost of providing pensions is not certain and varies from year to year.