Question

Which of the following is a correct statement concerning the evaluation of a pension trust fund?

A) The actuarial value of the plan assets reported on the pension's schedule of funding progress equals the fair value of the plan assets reported on the pension's statement of plan assets.
B) An employer contribution that consistently equals the annual required contribution is generally an indication that the pension plan is being sufficiently funded.
C) A funded ratio (actuarial value of assets/actuarial accrued liability) of less than 100 percent indicates a financially troubled (unsound) pension plan.
D) All of the above statements are correct.

Answer 1

The correct statement about pension trust fund evaluation is that consistent employer contributions meeting the annual required contribution usually indicate sufficient pension funding. Actuarial asset values may differ from fair values, and a funded ratio under 100% doesn't always mean a plan is in financial trouble. Option B is correct.

Step-by-step explanation:

The correct statement concerning the evaluation of a pension trust fund is: B) An employer contribution that consistently equals the annual required contribution is generally an indication that the pension plan is being sufficiently funded.

This statement implies that if an employer is making regular contributions to a pension plan that are equivalent to what's required annually, the plan may be on a solid footing for future obligations. However, the key terms to understand in pension fund evaluation include the actuarial value of plan assets, which might differ from the fair value due to smoothing techniques used by actuaries, and the funded ratio, which compares the actuarial value of assets to the actuarial accrued liability.

A funded ratio of less than 100 percent does not necessarily indicate a financially troubled pension plan; it could also indicate a plan that has been underfunded in the past but is currently making the necessary contributions to meet future liabilities. Therefore, it’s essential to analyze the context and trend of funding over time rather than relying upon a single metric.