Reforming the Valuation and Funding of Pension Promises: Are Occupational Pension Plans Safer?

31 Pages Posted: 13 Aug 2008

See all articles by Juan Yermo

Juan Yermo

Organization for Economic Co-Operation and Development (OECD)

Date Written: September 1, 2007

Abstract

This paper assesses current regulatory and accounting developments in the OECD area against their purported goals. It specifically considers the different approaches to valuing pension liabilities and questions the possibility of convergence between funding and business accountants' valuation standards for pension liabilities. It concludes that the trend towards market-based valuation methods in business accounting is not entirely consistent with the parallel exercise undertaken by many pension regulators. Since valuation methods for funding purposes are likely to continue moving towards a market-based model, policymakers should be all the more cautious in setting funding regulations so as to provide sufficient flexibility to pension funds in covering funding deficits while providing incentives to establish funding buffers in good economic times. We also argue that accounting rules and regulatory changes are driving plan design in some OECD countries such as Japan, the Netherlands and the United Kingdom and can lead to procyclical investment behaviour by pension funds.

Keywords: Pension funds, defined benefit, funding rules, investment, discount rates, accounting, valuation

JEL Classification: G18, G23, J32, M41, M43, M44, M47

Suggested Citation

Yermo, Juan, Reforming the Valuation and Funding of Pension Promises: Are Occupational Pension Plans Safer? (September 1, 2007). OECD Working Paper No. 13, Available at SSRN: https://ssrn.com/abstract=1217280 or http://dx.doi.org/10.2139/ssrn.1217280

Juan Yermo (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

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