Answer-first summary for fast verification
Answer: Funding risk represents the true long-term risk to the plan sponsor.
B is correct. Funding risk of a defined benefit plan is the risk that the value of the pension plan assets will not be sufficient to meet the pension plan liabilities. If the plan has a deficit (that is, if the surplus turns negative), the plan sponsor (the manufacturing company in this case) has to provide additional contributions to the fund. This additional contribution (the funding risk) is borne by the company's shareholders (and not by the employees). Thus, the funding risk represents a true long-term risk to the company (plan sponsor).
Author: LeetQuiz Editorial Team
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In the context of a manufacturing company's board of directors conducting an evaluation of the firm's defined benefit pension plan, which of the following statements most accurately describes the funding risk linked to this plan?
A
Decreases in interest rates always reduce funding risk.
B
Funding risk represents the true long-term risk to the plan sponsor.
C
Funding risk is effectively transferred to the employees of the manufacturing company.
D
As the time horizon for expected payouts gets longer, the plan's funding risk decreases.
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