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OECD Working Papers on Insurance and Private Pensions

Selected studies on insurance and private pensions policy prepared for use within the OECD and addressing such policy issues as risk management, governance, types of investments, and benefit protection. This working papers series has been discontinued; it is superseded by ‘OECD Working Papers on Finance, Insurance and Private Pensions’ available via: http://dx.doi.org/10.1787/20797117.

English

Reforming the Valuation and Funding of Pension Promises

Are Occupational Pension Plans Safer?

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.

English

Keywords: valuation method, actuarial method, accounting, funding rule, investment, discount rate, defined benefit, pension fund, fair value
JEL: G18: Financial Economics / General Financial Markets / General Financial Markets: Government Policy and Regulation; J32: Labor and Demographic Economics / Wages, Compensation, and Labor Costs / Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions; G23: Financial Economics / Financial Institutions and Services / Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
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