Real world examples are complicated. To help you understand, in a simplified manner, the general workings of the Actuary in determining the DBO and Service Cost, we ignore decrements (mortality, attrition, termination) in this example and only allow for a benefit to be paid on the retirement date.
Let’s say a company pays an End of Service Benefit (“EOSB”) upon normal retirement age of 60 years. The benefit is defined as one month’s salary per year of service (e.g. 20 years’ work will give 20 months’ salary as a one-off lump sum payment). The company has one employee only.
Our assumptions are as follows:
|Assumption Type||Details of Assumption|
|Salaries||Growth of 5% for each future year|
|Interest/Asset rate of return||4% per annum, based on 20-year term quality bonds|
|Contract Term||To Normal Retirement Age|