Can someone pls explain to me why we have higher liquidity needs with smaller pension contributions?
Interestingly, I just finished writing a mock exam question that involves this very idea.
When a company makes its annual contribution to its pension plan, what, exactly, does the company contribute?
money
Liquid money.
hold on.
ok, so they are contributing liquid money towards their pensions, which means they need to keep enough liquid aside to meet any uncertainty. So higher contributions, then it should be higher liquidity needs
Then the statements higher liquidity needs and smaller pension contributions is wrong then
Look at it from the pension’s perspective, less contribution from employer = pension fund needs to use its own money to pay out to beneficiaries. Thus, need to hold more liquid assets.
Um . . . no.
Their liquidity needs are their liquidity needs: a fixed amount irrespective of where they get the liquidity.
So . . . if they get less liquidity from the employer contributions, they need . . . ?
Ok, I have it all mixed up.
Please correct me if I am wrong.
We have the pension plan set up by the employer to make pension payments to its employees when they retire. Contributions to this pension plan come from both the employer and employees. If the contribution stops because I guess the fund is well funded, we need to have liquidity aside to pay these people retiring. So no contribution, we need higher liquidity. Do I make sense?
Higher liquidity in the portfolio.
Yes.
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finally
thank you
I think like this as well. If less contributions we need hold more liquid assets. This help.