CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity
Under IFRS, a company sponsors a defined benefit pension plan. Which of the following best describes who bears the investment risk on the plan assets?
The employer sponsoring the plan bears the investment risk in a defined benefit plan, because it promises a specified retirement benefit regardless of how plan assets perform. If assets fall short of obligations, the employer must contribute more. In defined contribution plans, employees bear that risk.
- AThe plan participants
- BThe employer sponsoring the planCorrect
- CThe insurance regulator
Explanation
In a defined benefit plan the employer promises a specified benefit, so the employer bears the investment and actuarial risk. If assets underperform, the company must fund the shortfall. Participants bear this risk in defined contribution plans, not defined benefit plans.
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