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4.3.2. Risk associated to defined benefit pension funds
Unlike defined contribution funds, defined benefit funds are subject to a wide range of risks83.
The funds liabilities are subject to the development of real labour earnings (affects the replacement ratio which may be guaranteed) and inflation, interest rates at which future payments are discounted and longevity84.
Whereas the funds assets are subjects to market risk (changes in value and return of an investment), credit risk (possibility of default), liquidity risk (assets sale below book value)85.
83 The risk for members of a DB plan are in principle the same as for the fund but ultimately they face the risk of the sponsors default (as guarantor)
84 PORTFOLIO REGULATION OF LIFE INSURANCE COMPANIES AND PENSION FUNDS commissioned by the OECD, E Philip Davis, Brunel University London
85 Franzen, Dorothee, MANAGING INVESTMENT RISK IN DEFINED BENEFIT PENSION FUNDS, OECD WORKING PAPER, March 2010, p 7