The correct answer is: D. Early death
Pensions are a type of retirement plan that provides income to retirees. They can be funded by employers, employees, or a combination of both. Pensions can help to address the risk of life longevity, inflation, and investment risk. However, they cannot address the risk of early death.
If an individual dies before they retire, they will not receive any pension benefits. This can be a significant financial loss for the individual’s family. There are a few ways to protect against the risk of early death. One way is to purchase life insurance. Life insurance can provide a death benefit to the individual’s beneficiaries, which can help to replace lost income. Another way to protect against the risk of early death is to save for retirement on your own. This will give you a financial cushion in case you die before you retire.
Here is a brief explanation of each option:
- Life longevity: This is the risk that an individual will live longer than expected. This can be a financial risk, as it means that the individual will need to have more money saved for retirement. Pensions can help to address this risk by providing income for life.
- Inflation: This is the risk that prices will increase over time. This can erode the purchasing power of a pension, as the pension may not be able to keep up with inflation. Pensions can help to address this risk by indexing the pension to inflation.
- Investment risk: This is the risk that the value of an investment will go down. This can be a financial risk, as it means that the individual may not have enough money to retire on. Pensions can help to address this risk by investing in a diversified portfolio of assets.