DB plan - Add pensioned new employee - Liquidity requirement

CFA Level III
#1

* 2014 CFA AM Q5

Add more new employees should accumulate more DB plan liability and no effect on near term liquidity. Why the answer shows the liqudity requirement will be lower? Thanks.

* The question uses proportion of active lives will increase

#2

Because the pension payment for these employees is well into the future. You need liquidity to satifsy short-term liability obligations (cash outflow to retired employees)

#3

Thanks., but outflow is unchanged.

#4

Yeah Galli is wrong - it’s because the contributions for the new employees increases the size of company contributions to the fund, so they need to liquidate fewer assets to pay off their existing participants per period, so inflow increases while outflow stays the same (and projected benefits to be paid increases so you don’t get an uptick in the funded status).

#5

With new employees comes new contributions.

as "with great power comes great responsibility "

#6

Thanks, but is it always the case? New employee => plan sponsor will make contribution?

#7

Not wrong, just stated differently.

#8

If they are a pensioned employee, as is alluded to in the question you’re referencing in CFAI’s 2014 AM exam. But no, there could be employees not part of a pension.

#9

Thanks. Pensioned new employee => plan sponsor will definitely make contribution. Correct?

I may need to retake L2…

#10

Generally yes, but if the pension is overfunded it’s possible the company doesn’t contribute. This wouldn’t be questioned as a liquidity factor though I don’t think, unless it is explicitly mentioned whether or not they will contribute (like it did in this question).

I’m just thanking the man upstairs I never have to look at that L2 test ever again - jesus!