Hi all,
It is said that DB plans is a type IV liability (i.e. unknown payment date + amount) - but isn’t the age of retirement known in advance (e.g. retire at age 65)? This makes DB a Type III (known time but unknown amount) ?
Similar for a DC plan where the amount of payout is based on the salary of the employee, so payout in that case would be known, in addition to the timing ? DC is then a Type I liability ?
Thanks,
Will everyone retire at 65? Guaranteed?
If so, you know when the first payment will be made. How about the last? Will each employee survive the same number of years after retirement?
What’s your salary going to be next year? The year after that? And the year after that?
Ok, so DB is a Type IV liability.
For DC, from the perspective of the company, an employee is set to retire next year (assume no more change to the salary). In this case, would it then be a Type I ? (known date: in 1 year. known amt: salary will not change) ? If so, can we conclude DB is always a Type IV and DC varies?
Thanks again,
Yes.
If the company has only one employee, that is.
I’ve heard of companies that have two employees, and some with as many as three!
Greetings friend! If you have only one employee and that employee has a fixed retirement date and no health problems and swears never to quit or be fired or die early, and also swears to contribute the same amount of money from his or her salary each year (a salary which is also known with certainty until retirement) to the plan for matching, then yes DC perhaps could be classified as more “known in quantity and timing” in such hypothetical case.
But one easily can see how all of these assumptions probably conflict with the real world, so it’s hard to label any pension plan, even a DC plan, as a liability known with certainty. Most of what I wrote above also applies to DB plans as you can see, as well. With DB plans having added responsibilities of investment risk to the plan sponsor, to meet its obligations for the (unknown) remaining life of the plan beneficiaries (and perhaps their surviving spouses, who could be much younger/healthier than the first recipient retirees).
Cheers - good luck - you got this 