Projections of Pension Fund Solvency under Alternative Accounting Regimes

This paper examines the impact of three alternative accounting regimes on perceived pension fund solvency. Deterministic accounting assumes actuarially smoothed valuation of assets and liabilities. National accounting is based on market valuation of assets and on actuarial valuation of liabilities. International accounting books assets and liabilities to market values. Using closed-form methods based on the funding ratio return, we exemplify the dramatic effect that the choice of accounting approach has on long-horizon solvency projections. Key words: pension fund, solvency, long-horizon return, asset liability management, accounting standards