Csp Q06

Front 1

QBS 6: 1 of 6
Weakness of a guaranteed system that allows permissive funding and investing standards

Back 1

1) Sponsor had interest to fund as little as possible
2) Allows weak companies to drag down strong ones
a) Company that can't pay competitive salaries can increase pension
3) Does not diversify risk on insurer since most companies have similar asset allocation in equities

Front 2

QBS 6: 2 of 6
A Guarantee system should have the following characteristics

Back 2

1) Plans would remain fully funded at all times
2) Monitor and enforce rather than claims-paying insurer
3) Failures would be rare misfortunes
4) Plans would be fully funded on a termination basis
5) Plans would not take on new liabilities without sufficient assets to cover them

Front 3

QBS 6: 3 of 6
Forces that contribute to underfunding

Back 3

1) Poor asset performance combined with low interest rates
2) Poorly structured pension funding system
a) Plans can increase benefits even when poorly funded
b) Lack of accountability
c) Funding incentives small
3) Poorly designed insurance system
a) Premiums not properly adjusted to reflect risk
b) Can be gamed by sponsor
c) Creates moral hazard
d) Creates incentive for company to terminate plan

Front 4

QBS 6: 4 of 6
A properly designed pension system should

Back 4

1) Provide incentives to fund plans, especially during good economic times
2) Provide transparency to participants
3) Ensure accountability
4) Not be too onerous given system is voluntary

Front 5

QBS 6: 5 of 6
Risks created when company facing insolvency

Back 5

1) PBGC's risk exposure significantly increased
2) Plan participants in terminated plans may lose pension due to insurance benefit limits
3) More people retire early and elect a lump sum, if available
a) Can create a run on the assets

Front 6

QBS 6: 6 of 6
A properly designed insurance system should (either private or public system)

Back 6

1) Have premiums reflecting
a) Sponsor's financial condition
b) Nature of plan's investment portfolio
c) Structure of the plan's benefit provisions
2) Provide incentives to fully fund plan and stay fully funded
3) Not encourage healthy companies to exit