CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Aggressive actuarial assumptions can be detected if a company's ______ is much higher than that of its competitors.

I. discount rate.
II. expected rate of return on plan assets.
III. rate of compensation increases.
Correct Answer: I and II

A high rate of compensation increases actually increases PBO.

User Contributed Comments 7

User Comment
niti discount rate also increases pension expense..?
Xiaochao but higher discount rate decrease the present value of the defined future benefits.
bananabun2 the company needs to pay for the interst cost = discount rate x PBO. higher discount rate = higher funding requirement. the answer seems to be II
lortola Why discount rate? a higher discount rate is more conservative than a lower one. Aggressive companies will have higher expected rate of retuen on plan assets and lower discount rate (which over- estimates the PV of plan assets)
charlie Although the effect on the service cost is offset in part by the interest cost effect, the effect on the service cost is normally much greater. Thus, in most cases, a higher discount rate reduces reported pension cost.
czar Agree with Charlie, this is a great question! I did not think of taking the pension costs into considieration for aggressiveness. @Lotola: aggressive here, refers to putting aside less for future pension benefits, hence higher discount rate reduces the pv of future obligation. Hope this helps
quanttrader higher discount rate decreases service cost more than the increase in interest expense and hence pension expense will overall decrease
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