Economic Pension Expense

Economic Pension Expense

	2008	2007
Net pension cost (*1)	7,704
service cost	8,298
interest cost	4,128
actuarial loss (gain, if negative)	-1,932
actual return (positive return, if negative)	-7,084
economic pension expense (*2)	3,410
plan assets
funded status	2,524	934
Employer contributions	5,000

(*1) AKA reported pension expense
(*2) Economic pension expense = Service cost + Interest cost + Actuarial loss - Actual return on plan assets
= 8,298 + 4,128 -1,932 - 7,084 = 3,410

Alternatively,
Economic pension expense =  Employer Contributions(*) - Δfunded status
= 5,000 - (2,524 - 934) = 3,410

(*) Participant(=Employee) contribution is NOT included.

∴ economic pension expense (3,410) < reported pension expense (7,704)

Furtheremore,
Economic pension expense =  Benefits paid + ΔPBO - Actual return on plan assets

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Economic Pension Expense

	2008	2007
economic pension expense	4,250
plan assets
funded status	2,524	934
Employer contributions	5,000
CFO adjustment	+750
CFI adjustment	0
CFF adjustment	-750

Note:

• Ignore income taxes.
• Economic pension expense represents the true cost of the pension. If the firm's
• employer contributions > economic pension expense
• employer contributions (CFO) - economic pension expense = 5,000 - 4,250 = 750
• viewed as a reduction in the overall pension obligation similar to an excess principal payment on a loan (CFF).