Question

Which of the following would an actuary not consider in making actuarial assumptions for a Defined Benefit Pension Plan?

a.) Inflation
b.) Profitability of the plan sponsor
c.) Expected investment returns
d.) Employee turnover

Answer 1

In making actuarial assumptions for a Defined Benefit Pension Plan, an actuary would not directly consider the profitability of the plan sponsor, but would focus on factors such as inflation, expected investment returns, and employee turnover.

Step-by-step explanation:

An actuary involved in making assumptions for a Defined Benefit Pension Plan would consider various factors that can impact the future liabilities and assets of the plan. These factors include inflation, which affects the purchasing power of future pension payments, expected investment returns, which influence the growth of plan assets, and employee turnover, which can affect the number of employees eligible for benefits and the timing of those benefits. However, the profitability of the plan sponsor is not directly a concern in actuarial assumptions because it does not impact the liabilities or the calculations related to the pension obligations themselves.

Pensions, often known as defined benefits plans, provide a fixed income that does not typically increase over time, making inflation a critical consideration for actuaries. In contrast, defined contribution plans like 401(k)s do not have predefined benefits at retirement, transferring investment risk to the individual and potentially providing protection against inflation if the investments perform well.