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Explanation:
The correct answer is C.
When an economy experiences a slowdown or downturn, equity markets typically perform poorly. Since the pension fund is heavily invested in stocks, the value of the fund's assets will likely decrease, creating or widening a funding deficit.
Furthermore, during an economic downturn, the plan sponsor's core business operations usually suffer, leading to reduced operating profits and cash flows. This severely restricts the sponsor's financial ability to make the additional contributions required to offset the decrease in the pension fund's assets.
Therefore, both the pension fund's asset value decreases, and the sponsor's ability to cover the resulting shortfall is compromised.
Choice A is incorrect: An economic slowdown will adversely affect a stock-heavy pension fund due to falling equity prices. Choice B is incorrect: An economic slowdown typically causes stock prices to fall, which decreases rather than increases the value of the fund's assets. Choice D is incorrect: While it correctly identifies that the sponsor's ability to make contributions will be restricted, it incorrectly states that the value of the fund's assets will increase.
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Q.2496 A pension fund has heavily invested in stocks. The fund manager predicts a slowdown in the economy going forward. Which of the following is an accurate statement?
A
There will be no adverse effect on the pension fund.
B
The value of fund’s assets will increase, thus increasing the surplus.
C
The value of fund’s assets will decrease, and the economic downturn will severely restrict the sponsor’s ability to make contributions.
D
The value of fund’s assets will increase, but the economic downturn will severely restrict the sponsor’s ability to make contributions.