If pension benefit plan expects higher inflation in the next 3 years and intiates a program to protect the pension scheme’s financial strength from the effects of UK inflation by indexing benefits paid by the scheme.
State recommended action is correct or incorrect?
Answer: Incorrect. The implementation will protect plan participants not the plan itself. The increase cost of funding would increase thereby weakening the plan as inflation increases.
My question: What is the difference between protecting the plan vs protecting the plan participants?
Gaaaah… I hate this question as well. It is basically talking about the trade-off between protecting current pension benefits by indexing them to inflation vs. the increased cost associated with that indexing which raises the Pension Benefit Obligation (i.e. lowering the pensions strength/funded status). I feel like this question can be argued either way… I hope S2000 chimes in on this one!