A year later the company is considering making changes to the DB plan. The status of the plan has not changed materially. The company is considering freezing the plan and starting a defined contribution (DC) plan to eventually replace the DB plan. They are considering two alternatives:
Closing the DB plan to new participants but continue to make contributions for existing participants.
Closing the DB plan to new participants and freezing the existing benefits of existing participants at the existing level of benefits earned. Discuss how each of the following items would be affected under both alternative 1 and 2: Plan surplus; Liquidity needs; Time horizon.
The question is, Discuss how each of the following items would be affected under both alternative 1 and 2: Plan surplus; Liquidity needs; Time horizon!
The key to answering make it clear that you know neither alternative has an immediate impact on PVA, PVL, or surplus.But both reduce the company’s contribution requirements. Alternative 1 reduces contribution requirements by eliminating only new participants from joining the plan and alternative 2 reduces contribution requirements even more by freezing all benefits at the current level. Plan payouts are not immediately affected so liquidity needs increase and time horizon begins to shorten; with alternative 2 having the more pronounced impact. It is arguable whether Alternative 1 and 2 have a difference in the degree of shortening time horizon. You could interpret both as having the same effect on time horizon or that Alternative 2 has a somewhat greater impact in shortening time horizon more quickly.
There is no immediate impact on plan liability, but I think there may be further impact on plan liability. As there is no new participants, future liability will not change, but the present value to liability will decrease with time. Is that right?
And why both reduce the company’s contribution requirements? The text does not mention that the company will reduce contribution.