Why Is There Debate About Whether Economics Applies to Pensions?

Abstract

Measures of the economic value of liabilities are essential inputs to analysis of the balance sheet of any entity that has a balance sheet. They are also essential inputs to measuring the cost of new financial commitments. Despite these facts, plan sponsors and actuaries often respond defensively to attempts on the part of economists to promote the use of economic valuation of pension liabilities. This article illustrates how pension liability valuation rules are inconsistent with the principles of economics, describes an opaque decision environment, which impedes the consideration of economics by pension decision makers, and makes suggestions for action.

TOPICS: Pension funds, risk management