Plan Sponsor Risk

AIM 75.9: Define plan sponsor risk and distinguish between economic risk and cash flow risk.

The plan sponsor risk is an extension of surplus risk and how it relates to those who ultimately bear responsibility for the pension fund. We can distinguish between the following risk measures:

• Economic risk is the variation in the total economic earnings of the plan sponsor. This takes into account how the risks of the various components relate to each other (e.g., the correlation between the surplus and operating profits).

• Cash-flow risk is the variation of contributions to the fund. Being able to absorb fluctuations in cash flow allows for a more volatile risk profile.

Ultimately, from the viewpoint of the sponsor, the focus should be on the variation of the economic value of the firm. The management should integrate the various risks associated with the movement of the assets and surplus with the overall financial goals of the sponsor. This is aligned with the current emphasis on enterprise-wide risk management.

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