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How would negative returns affect the wealth of employees and employers?

How would negative returns affect the wealth of employees and employers?

In a defined contribution fund the employees bear the risk of a low or negative returns on the investment of plan assets. This is because the benefits paid on retirement are a function of the level of contributions and the return achieved on plan assets. Thus, the employer is not directly affected by the poor performance of the defined contribution fund because it has no obligation for additional contributions if the superannuation fund is unable to pay benefits to members on retirement.

Members of defined benefit plans would not be affected by the negative returns achieved by the fund. Their benefits are defined in terms of their years of service and level of remuneration, rather than by the performance of the fund. The employer has an obligation for the excess of the defined benefit over the plan assets. However, variations between actual and expected returns on plan assets are actuarial gains and losses, which are not immediately recognized under the partial capitalization method adopted by IAS 19.

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