Another Settlement Accounting question (or two)

[dmb]

1/1/14 Pension Expense calculated using a 4.5% discount rate. Settlement threshold based on 1/1/14 Pension Expense is $1.0M. Lump Sum of $1.2M paid effective 6/1. Plan sponsor performs settlement accounting as of 6/1 rather than end of year. As part of settlement accounting, obligations are re-measured at a 4.00% discount rate. A few questions:

1. Is pension expense re-measured as of 6/1/14 at 4.00%? Is the resulting total year Pension Expense a combination of 5/12 of the Pension Expense determined at beginning of year at 4.50% plus 7/12 of the Pension Expense determined at 6/1/14 at 4.00%?
2. After the settlement accounting, does every subsequent lump sum trigger settlement accounting (because the threshold for the year has been crossed) or is the slate wiped clean and the plan sponsor starts building anew toward meeting a new threshold and a second settlement accounting for the year is performed only if subsequent lump sums exceed the new threshold? What is the new threshold? Is it based on the Service Cost and Interest Cost at 4.00%? And is it full year amounts or pro-rated amounts for 7/12 of the year?

Thanks in advance for all responses.

[Effen]

1. I would say yes, but you could have other settlements that will give you more than 2 pieces.

2. I would say yes - each subsequent lump sum will trigger a re-measurement which may change the discount rate.

I think the answer to both questions is yes, which is why most people only do the settlement accounting once, at the end of the year. Doing a re-measurement after each lump may be technically correct, but an administrative pain.

[david rigby]

I agree with Effen's response.