Question

3. The Global pandemic in year 2020 has caused a decline in the prices of equity and credit securities. Many superannuation funds are expected to generate negative returns on investments during this period.

Required

Discuss how negative returns would affect employees and employers if the superannuation funds is a:

i.          defined benefit plan                                                                                        

ii.         defined contribution plan                                                                                

Answer 1

A superannuation fund is a pension program in an organization for the benefit of its employees.

As the prices of equity and credit securities have declines because of the pandemic, it is going to convert into negative returns.

Defined Benefit Plan

Employee- The employee will get the fixed same amount as his pension. In a defined benefit plan the employer takes responsibility of the risk involved because of the fluctuation in the value of the fund.

Employer- The employer who has taken the responsibility of paying a fixed amount will suffer extra expense to match the pension fund to the fixed benefit.

Define Contribution Plan

Employee- In a defined contribution plan, the employer pays a fixed amount which is invested by the employee. The risk of the investment is borne by the employee. Hence, if the returns are reducing, the employee will suffer the disadvantage.

Employer- The employer only has to make a fixed payment to the fund. Hence, he is not affected by the falling returns.

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