Which of the following statements pertaining to defined benefit pension plans is not correct?

A) The funded status of a pension plan is an indicator of potential cash flow problems.
B) Pension plan sponsors must make an annual contribution to the pension fund for an amount equal to the service cost regardless of the funded status of the pension plan.
C) A small change in the pension discount rate can shift the funded status of the pension from year to year.
D) Research provides evidence that firms with underfunded pension plans have lower current cash flows and are likely to have lower future cash flows relative to firms with overfunded pension plans.

Question

Sahil Chawla · Accepted Answer

Final Answer : B, Explanation :  Pension plan sponsors are required to contribute an amount equal to the service cost only if the plan is underfunded. If the plan is overfunded, the sponsor may not be required to make a contribution.

Definitions

Learning Objectives

Learning Objectives

Related questions