The statement made by the pension fund manager is not universally true. It is important to understand that the ability of a plan sponsor to adopt a more volatile risk profile is not solely dependent on cash flow risk. Rather, it is also significantly influenced by the plan sponsor's capacity to absorb greater variations in funding costs. If a plan sponsor has the financial strength to withstand larger fluctuations in funding costs, they have the flexibility to adopt a more volatile risk profile. This is because they can afford to take on higher-risk investments that may potentially yield higher returns, despite the increased risk of year-to-year fluctuations in contributions to the pension fund. Therefore, the statement made by the pension fund manager is not true for plan sponsors who can absorb greater variations in funding costs.

Choice A is incorrect. The statement is not universally true for all plan sponsors. The ability to adopt a volatile risk profile depends on the specific circumstances of each plan sponsor, including their financial strength and risk tolerance.

Choice C is incorrect. This statement contradicts the basic principles of risk management. A plan sponsor who cannot absorb greater variations in funding costs should ideally adopt a less volatile risk profile to minimize cash flow risks.

Choice D is incorrect. While it's true that cash flow risk can be mitigated by restricting the sponsor’s funding options, this does not necessarily enable them to adopt a more volatile risk profile. In fact, restricting funding options may limit the potential for higher returns associated with more risky investments.

Things to Remember

• Cash flow risk is the risk associated with the variability in cash flows, which can impact the ability of a plan sponsor to meet its funding obligations.