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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) 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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The board of directors at a manufacturing company is currently reviewing the defined benefit pension plan for its employees. In this context, which of the following statements accurately describes the funding risk inherent in the defined benefit pension plan being examined?
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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