1. If each individual retires at age 65, how much will his or her estimated pension be?
2. Life expectancy for both employees is 15 years at age 65. If the firm buys an annuity from an insurance company to fund each pension and the insurance company asserts it is able to earn 9 percent on the funds invested in the annuity, what is the cost or the amount required to purchase the annuity contracts?
3. If the firm can earn 8 percent on the money it must invest annually to fund the pension, how much will the firm have to invest annually to have the funds necessary to purchase the annuities?
4. What would be the impact of each of the following on the amount that the firm must invest annually to fund the pension?
a) Life expectancy is increased to 20 years.
b) The rate of interest on the annuity contract with the insurance company is reduced to 7 percent.
c) Barber retires at age 62 instead of 65.
|Erin O Reilly was recently employed by the human resources department of a moderate-sized engineering firm. Management is considering the adoption of a defined-benefit pension plan in which the firm will pay 75 percent of an individuals last annual salary if the employee has worked for the firm for 25 years. The amount of the pension is to be reduced by 3 percent for every year less than 25, so that an individual who has been employed for 15 years will receive a pension of 45 percent of the last years salary [75 percent – (10 x 3%)]. Pension payments will start at age 65, provided the individual has retired. There is no provision for early retirement. Continuing to work after age 65 may increase the individuals pension if the person has worked for less than 25 years or if the salary were to increase.|