A pension fund will owe $ 20 million to retirees in 25 years. An actuary assumes a 5.6% rate of return on the funds invested in the pension plan, but the fund actually earns 7.1%. The pension plan receives annual contributions from the company sponsor. If the 7.1% rate of return is expected to continue, by how much can the company reduce its pension payments per year?

Question

Quizplus · Accepted Answer

Calculator entries to determine what would be paid at the expected return of 5.6% are n = 25, I/Y = 5.6, PV = 0, FV = 20,000,000, CPT PMT → −385,569.72.
Calculator entries to determine what would be paid at the actual return of 7.1% are n = 25, I/Y = 7.1, PV = 0, FV = 20,000,000, CPT PMT → −311,699.20.
The difference in the payment amounts is $385,569.72 - 311,699.20 = $73,870.52.

A Pension Fund Will Owe $ 20 Million to Retirees