hi in a defined benefit scheme, will the employer takes all the longevity risk? in a defined contribution scheme, will the employee takes all the longevity risk?
In a defined benefit scheme, the employee typically pays a fixed contribution (or occasionally the scheme will be non-contributory so the employee doesn't pay anything). The employer typically pays the "balance of cost". So if, for example, pensioners live longer than expected, then the employer will have to pay higher contributions than expected. So yes, the employer is taking on the longevity risk. Similarly, if investment returns are lower than expected, then the employer will have to pay higher contributions than expected. In this way, the investment risk is taken on by the employer. In a defined contribution scheme, on the other hand, the employer generally pays a fixed contribution and the employee pays a fixed contribution as well. So if experience is worse than expected, this will be the employee's problem. Hope this answers your question!
Barney covered the investment risk. For longevity/mortality risk: DB - Sponsor holds risk that people live longer DC - Depends. If insured then insurer holds risk once you have your annuity. If paid by Plan where the Plan effectivly sells annuities, the Plan (and probably sponsor) have the longevity risk. However, the member has the risk that the assumed mortality rate used in pricing is lower than actual. Ie, that the assumptions for the price of annuities are too prudent, so member loses out when he buys the annuity.
