Clark Industries has a defined benefit pension plan that specifies annual retirement benefits equal to:
1.2% × Service years × Final Year’s salary
Stanley Mills was hired by Clark at the beginning of 1992. Mills is expected to retire at the end of 2036 after 45 years of service. His retirement is expected to span 15 years. At the end of 2011, 20 years after being hired, his salary is $80,000. The company's actuary projects Mills's salary to be $270,000 at retirement. The actuary's discount rate is 7%.
1. Estimate the amount of Stanley Mills's annual retirement payments for the 15 retirement years earned as of the end of 2011.
2. Suppose Clark's pension plan permits a lump-sum payment at retirement in lieu of annuity payments. Determine the lump-sum equivalent as the present value as of the retirement date of annuity payments during the retirement period.
3. What is the company's projected benefit obligation at the end of 2011 with respect to Stanley Mills?
4. Even though pension accounting centers on the PBO calculation, the ABO still must be disclosed in the pension footnote. What is the company's accumulated benefit obligation at the end of 2011 with respect to Stanley Mills?
5. If we assume no estimates change in the meantime, what is the company's projected benefit obligation at the end of 2012 with respect to Stanley Mills?
6. What portion of the 2012 increase in the PBO is attributable to 2012 service (the service cost component of pension expense) and to accrued interest (the interest cost component of pension expense)?