Hi
Would the employer contributions increase (and liquidity needs decline) just by an increase in the number of active workforce due to more new people joining the company? One of the past papers suggests so and I am unable to rationalise.
Why would that be the case?
plan assets could be structured to mimic financial risk factors in liabilities like interest rate risk, inflation risk , wage growth to minimize surplus volatiliy but they cannot be managed only for the sole plan sponsors’ objective to reduce contributions for future new employees(which is a non financial risk) , the portfolio manager in plan assets has fiduciary duty to plan beneficiaries only(employees). The most the plan sponsor can do is to have a return objective bigger than the discount rate used for liabilites only when there is enough room for additional risk (surplus).
And of course the liquidity needs decline as the number of active workforce increases with the new employees as they they will draw future benefits out of the plan in a distant future.
Hope I made myself clear
Please elaborate.
Time 0
100 Active Employees
100 Retired Employees
Benefit Payments = 10,000
Time 1
200 Active Employees
100 Retired Employees
Benefit Payments = 10,000
I cannot see why new employees would reduce the liquidity needs
As I understand it it’s because the money coming in from the sponsor can be used to pay benefits rather than having to liquidate plan assets. Therefore if there are more active members liquidity needs are lower
Accrued benefits stay the same as you have mentioned above , plan assets grows with the contributions for the new employees (cash inflow). In other words asset base grows but shorter time expenses stay the same -> benefit payments/plan assets is a lower % number , liquidity need is lower
//plan assets grows with the contributions for the new employees (cash inflow).//
Is that the default assumption?
Hassan if there are new more employees, the employer will have to start arranging for their pension. Think of government employee pension after retirement in KSA. So if there are more workers, the employer (or Govt. for example in case of KSA) will have to contribute more funds now into pension plan that will pay for these workers when they retire. In other countries, good private companies also arrange for pension plan for employees.
Do employers make contributions for every new employee that joins the company?
Yes, those private/public/sector companies that offer benefit pension plan to employees. Unless they stop offering that ( it would be mentioned in the question if the employer decide to stop) to new employees, for all previous employees who joined before that change will still have their benefit pension plan rights and employer must maintain their plan as before.