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FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans

Which feature is characteristic of a defined contribution pension plan rather than a defined benefit plan?

In a defined contribution plan, the retirement benefit depends on contributions made and the investment performance of the individual's account. The employee bears investment and longevity risk, whereas guaranteed benefits, sponsor deficit funding and sponsor longevity risk describe defined benefit plans.

  1. AThe sponsor guarantees a retirement income based on final salary
  2. BThe retirement benefit depends on contributions and investment performance of the individual accountCorrect
  3. CThe sponsor must fund any deficit between assets and promised benefits
  4. DLongevity risk is pooled and borne by the sponsor

Explanation

In a defined contribution plan, the retirement benefit equals the account balance, determined by contributions and investment returns. The other options describe features where the sponsor guarantees benefits, which is defined benefit.

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