Warden Corp. has a postretirement health benefit plan for its employees. As of December 31, 2006, the accumulated postretirement benefit obligation (APBO) is $250 million and the postretirement health benefit cost for the year was $23 million. The plan assets are $10 million. Warden chose to recognize its unfunded liability immediately. Warden also has a pension plan, which is fully funded.

a. What reasons are there for the minimal funding of the postretirement health benefits plans versus the full funding of the pension plan?

b. In 2006 Warden makes the following changes.

• Increases its expected rate of return on plan assets.
• Increases the expected compensation growth rate.
• Increases its discount rate.

Explain the effect of each of these on

i. economic cost as of the end of 2007.
ii. reported cost for 2007.

Question

Warden Corp. has a postretirement health benefit plan for its employees. As of December 31, 2006, the accumulated postretirement benefit obligation (APBO) is $250 million and the postretirement health benefit cost for the year was $23 million. The plan assets are $10 million. Warden chose to recognize its unfunded liability immediately. Warden also has a pension plan, which is fully funded.

a. What reasons are there for the minimal funding of the postretirement health benefits plans versus the full funding of the pension plan?

b. In 2006 Warden makes the following changes.

• Increases its expected rate of return on plan assets.
• Increases the expected compensation growth rate.
• Increases its discount rate.

Explain the effect of each of these on

i. economic cost as of the end of 2007.
ii. reported cost for 2007.

Quizplus · Accepted Answer

The Answer of Warden Corp. has a postretirement health benefit plan for its employees. As of December 31, 2006, the accumulated postretirement benefit obligation (APBO) is $250 million and the postretirement health benefit cost for the year was $23 million. The plan assets are $10 million. Warden chose to recognize its unfunded liability immediately. Warden also has a pension plan, which is fully funded.

a. What reasons are there for the minimal funding of the postretirement health benefits plans versus the full funding of the pension plan?

b. In 2006 Warden makes the following changes.

• Increases its expected rate of return on plan assets.
• Increases the expected compensation growth rate.
• Increases its discount rate.

Explain the effect of each of these on

i. economic cost as of the end of 2007.
ii. reported cost for 2007.