Gain on PBO; present value concepts
Response to the following problem:
Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.6% 3 service years X final year's salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 2002 and is expected to retire at the end of 2036 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $90,000 at the end of 2016 and the company's actuary projects her salary to be $240,000 at retirement. The actuary's discount rate is 7%.
At the beginning of 2017, changing economic conditions caused the actuary to reassess the applicable discount rate. It was decided that 8% is the appropriate rate.
Required:
Calculate the effect of the change in the assumed discount rate on the PBO at the beginning of 2017 with respect to Davenport.