Explanation

Let's analyze each option:

A. The longer the horizon for expected payouts, the lower the funding risk.

• Incorrect: Longer payout horizons actually increase funding risk because there's more uncertainty about future investment returns, interest rates, and mortality assumptions over longer periods.

B. Decreases in interest rates will reduce funding risk.

• Incorrect: Decreases in interest rates actually increase funding risk. When interest rates fall, the present value of future pension liabilities increases, requiring larger contributions from the plan sponsor to maintain adequate funding.

C. The funding risk has been effectively transferred to the employees.

• Incorrect: In a defined benefit plan, the funding risk remains with the employer/sponsor, not the employees. The employer bears the investment and longevity risks.

D. Funding risk represents the true long-term risk to the plan sponsor.

• Correct: Funding risk is indeed the primary long-term risk for plan sponsors in defined benefit plans. It encompasses the risk that the plan assets will be insufficient to meet future pension obligations, potentially requiring significant additional contributions from the sponsor.

Key Points:

• In defined benefit plans, the employer/sponsor bears the investment risk, longevity risk, and funding risk
• Funding risk includes the uncertainty about future contribution requirements
• This risk persists throughout the life of the pension plan and represents a significant long-term liability for the sponsoring company