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IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area

A mid-sized Indian firm wants to move its staff from a defined benefit retirement plan to a defined contribution plan. From the employer's viewpoint, which statement about this change is most accurate?

Investment and longevity risk largely shift from the employer to members. Under defined contribution the employer pays fixed contributions and the final benefit depends on investment returns, so the employer no longer guarantees a benefit or funds shortfalls, unlike under a defined benefit design.

  1. AInvestment and longevity risk largely move from the employer to the membersCorrect
  2. BThe employer takes on more longevity risk because contributions are fixed
  3. CMembers are guaranteed a final-salary-linked benefit
  4. DThe employer must still fund any shortfall in members' account balances
  5. Inflation risk is eliminated for members

Explanation

In a defined contribution plan the employer pays agreed contributions and the benefit depends on investment outcomes. Members therefore bear investment and, at retirement, longevity and inflation risk. The employer no longer carries the shortfall risk.

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