The projected unit credit method
A lump sum benefit is payable on termination of service and equal to 1% of final salary for each year of service. The salary in year 1 is 10,000 and is assumed to increase at 7% (compound) each year. The discount rate used is 10% per year. The following table shows how the obligation builds up for an employee who is expected to leave at the end of year 5, assuming that there are no changes in actuarial assumptions. For simplicity, this example ignores the additional adjustment needed to reflect the probability that the employee may leave the entity at an earlier or later date.
|
Year |
1 |
2 |
3 |
4 |
5 |
|
Benefit attributed to: |
|||||
|
— prior years |
0 |
131 |
262 |
393 |
524 |
|
— current year (1% of final salary) |
131 |
131 |
131 |
131 |
131 |
|
— current and prior years |
131 |
262 |
393 |
524 |
655 |
|
Opening Obligation |
89 |
196 |
324 |
476 |
|
|
Interest at 10% |
9 |
20 |
33 |
48 |
|
|
Current Service Cost |
89 |
98 |
108 |
119 |
131 |
|
Closing Obligation |
89 |
196 |
324 |
476 |
655 |
Note:
— The Opening Obligation is the present value of benefit attributed to prior years.
— The Current Service Cost is the present value of benefit attributed to the current year.
—The Closing Obligation is the present value of benefit attributed to current and prior years.
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