Pension minimum funding legislation and accounting requirements have been forcing liability calculations away from traditional actuarial methods towards more mark-to-market measures. Why has it been decided that these liability measures are more appropriate for minimum funding and accounting? Financial economics (or more specifically, pension finance) calls for pension market liabilities to be measured using bond rates. Using market liabilities, measured at bond rates, removes what would otherwise be a bias towards equity investment over bonds when making investment decisions.

Pension finance goes on to state what finance issues should be considered when making an asset allocation decision. From the shareholders point of view, the risk/reward trade off of investing in equities versus bonds has no first order effect. However, there are second order effects including stakeholder taxes, surplus ownership, and agency issues that should guide the investment decision.

The audiocast speakers provide an introduction to financial economics and what it has to say about the measurement of pension liabilities and broad asset allocation decisions.

Speakers